POV 4Y in a nutshell & what matters if you trade equity indices

The following is just my point of view and not the single source of truth. Hence, I would appreciate any comment which would lead to a fruitful discussion.

When you are trading equity indices, you are simply trading a bundle of cashflows (compromised by the companies within the index). If you are not a scalper (I am not) but rather a swing trader (what I try to do to finance my living/ family) you would do your analysis based on 4H, daily and weekly charts. But apart from that, the most important question is, is there any event, which affects the cashflows within the index. Then, is this effect temporary or permanent.

Typical events which affects more or less all cashflows within an index:

• Interest rate (central banks)
  
• GDP (incl. e.g. unemployment rate...)
  
• Inflation (defines the price for goods, hence the cashflow)
  
• Costs (incl. e.g. workforce costs...)
  
• Solvency (i.e. of your customers and the solvency is driven by market liquidity and interest rates)
  
• Uncertainty (these are mainly political risks like war, trade war etc. but sometimes also natural disasters and usually temporary even if they last for 1-2 years)
  
  
  To better understand these cashflow drivers, lets take as an example - the DJ and lets walk through 4 years and a couple of events, which drove the ups/downs in the DJ (from my POV):
  
  
• When Mr. Trump won the election in 2016 he soon started to initiate a very important law, the corporate tax law. Which would reduce the corporate tax significantly, hence has a hugh positive impact on the cashflows. Today, companies profit significantly from the law and uses the profit to buyback own shares or just pay higher dividends. Many companies have chosen the first option, which has two effects: First, higher demand for the own shares (which usually increases prices) and secondly, every share which they buy increases the profit of the company since dividendes paid are paid to the company and increases the income of the company (cashflows from financial activities), which increases the value of the company.
  
• The market anticipated the new law and consequently increased the valuation of the companies, knowing (or betting) that the law would effect the cashflow positively and smooth out any overvaluation in the future. This explains why we saw such an increase in asset prices starting in July 2017 (6 months before the law would come into effect). This is why we have left the Obama-Trend Channel moved to the Corporate-Tax-Cut-Trend-Channel.
  
• Then two things happend at the same time, which was not anticipated by the market: Trump started a trade war with China in Feb. 2018 and the FED announced, that it would start the process of balance sheet normalization, hence reduce the liquidity in the market. Both have negative effect on corporate cashflows. At that time, nobody knew how much liquidity would be reduced by the FED, how many rate hikes we would see and how long the trade war would last and would the consequences would be.
  
• After 4 rate hikes and further escalation of the trade war, everyone in the markets was nuts. Apart from the fact, that sentiments were in panic modus due to uncertainty, you could not see such negative effects in the cashflow of the "healthy" companies, but companies with a lot of debt were in panic modus, because money became more and more expensive (keep in mind, we have a lot of zombie companies, i.e. negative cashflows. These companies hope to pay back the corporate debt with own share (actually they sell these share to us) or some of them really believe, they will become profitable in the future).
  
• On the peak of this panic modus Mr. Mnuchin organized a call with the CEO of the 6 major US banks. The day after, they started to buy like crazy (here I have to guess: probably Mr. Mnuchin told them, that the gov would increase the pressure on the FED to lower interest rates and that before the next election Mr. Trump would find a solution (interim solution) regarding the trade war.)
  
• During this 12 months many traders made a fortune or maybe have lost a lot, this mainly to uncertainty. So never underestimate uncertainty and try to keep calm.
  
• When the FED announced the end of the balance sheet normalization and induced afterwards USD 400 billion into the markets again, the current rally started, which was just shortly stopped by the coronavirus.
  
• In my opinion, the market (nobody want to say that) hopes, that Mr. Trump will be re-elected and that he is going to do even more tax cuts, this time for the middle class in order to boost demand, this would again lead us to a new trend channel: The "Corporate Tax Cut and Middle Class Tax Cut" trend channel.
  

If he does not win the election, we would have again some uncertainty in the market.

I focus on these above mentioned "cashflow drivers", but I do not care so much on all the little indicators (these may change sometimes daily/weekly. Nevertheless I have build a heat map, showing me, when to many indicators are declining). But I use also the technical analysis, especially to define when to enter a trade and when to exit a trade. And I am not always right, just recently I posted a trade (S&P) which proved how wrong someone can be (in this case I had underestimated the PBOC and the ECB).

I hope you like my thoughts, if you disagree, just leave a comment and let's share our thoughts.