"Derivatives are weapons of mass destruction" - Warren Buffett
This chart calculates the gaps we have left behind. All because of massive interday futures trading.
A while ago, we didn't have that many derivatives. Interday trading had very little effect. In an overleveraged economy, just how much of current prices are based on actual growth? Indices are hitting new highs, getting inflated from more and more derivative trading and leverage.
Just how much of what we see is a bubble? Judging by this chart, we should go back to pre-2015 levels...
Trade lightly, for this is hallowed ground. - Wall Street Grigori
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The violation of this trend marks the end of QE. This shows the true effect. I hope you all understand it. With Green and Red arrows, I have marked the points I used to draw the rays.
These long-term rays, prove as significant resistance. Hitting one of them, was a fundamental reason the Black Monday was so severe.
Exactly right! I have a feeling that equity derivatives markets are about to get crazy. Cryptocurrency derivatives markets were the canary in the coal mine. The charts confirm this as well. The weekly chart of SQQQ (the short derivative for the Nasdaq 100) shows things are precariously dangling on a cliff's edge, as for the first time ever, the weekly EMA ribbon is now acting as support for SQQQ! This is all due to rapidly draining liquidity. I should note one important thing: When derivative markets get crazy, it's not necessarily a great short opportunity. Things can become so chaotic that winning trades don't even settle properly or on time. Remember that the whole premise of derivatives is that their value is derived from the value of some underlying asset, which sometimes itself is yet another derivative or which is rehypothecated. In essence, derivatives are illusions of wealth, whenever a liquidity crisis unfolds, this illusion finally becomes apparent. Therefore, derivates are, as you quoted Warren Buffet as saying: weapons of mass destruction.
akikostas
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@spy_master Thank you for the detailed explanation! I didn’t knew all of these details…
akikostas
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@spy_master I have to admit that I am in love with your SPX/(1/US10Y) chart. This is pure gold! After a lot of thinking about it’s meaning and function I would like to share with you an alternate calculation to this chart. The cost of money could be considered the rate of change on what we would gain if we invested in treasuries. While the 1/US10Y is a good approximation, and it is not wrong for sufficiently high yields, it can lead to inaccuracy in periods of low yields (like now). The mathematically accurate formula would be SPX/(US10Y+1/US10Y). I am driving now and just thought about it, i cannot add a chart. But if you plot it you will realize that: The recessions are not apparent now. Since recessions were mainly wealth transfer periods between equities and bonds. We also realize that we might have witnessed a “blow-off-top” on the 12M chart. This chart deserves a whole lot of analysis and conversation by itself! As always, thank you for the attention you show to every normal/crazy idea I might post!
akikostas
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@spy_master Or SPX/(1+1/US10Y), it depends on how we think about it…
akikostas
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@spy_master The first calculation is actually a two-step rate of change. It has US10Y^2 in it. It isn't actually a wrong calculation. It just treats yields cumulatively. I don't know which one of the two is "truer". I leave it up to you...