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Recession

Yield CurveThe 2/10 treasury yield spread is quickly flattening and an inversion could happen soon. All of the previous yield curve inversions are associated with memorable market sell-offs and recessions. I believe the ripple effect of the ongoing financial and economic sanctions against Russia will end up being the catalyst for the next meltdown. The market conditions have been favorable to a disaster by many measurements for some time now. Again, there are many unknown cross-currents beginning to work their way into the global economy. On top of that, the FED is raising interest rates in less than two weeks.
TVC:US10Y
by The_Arena_Trader
11
Jobs Data Giving Recession Vibe. Is the Fed Late to Act (Again)?Why does it seem like the Fed is playing catch-up with the economy? In 2021 and 2022, the US central bank was jamming stimulus at a fast clip. Suddenly it stopped and reversed course to raise interest rates at never-before-seen speed (that’s when officials were saying inflation was transitory). Now, the skyrocketing interest rates are threatening to derail the economy. Or worse — throw it in a recession. The red-hot US labor market is no more. Or at least there wasn’t anything red-hot for America’s workers and job seekers in July (except for maybe the coast-to-coast summer heat). And now financial markets are in limbo. America’s employers added just 114,000 new hires to the workforce — a far cry from the expected 174,000 and even that consensus view was soft. The bigger-then expected slump in US jobs growth fanned concerns over a flailing economy and there was one major player to pin the blame on — the Federal Reserve. What’s the Fed? The Federal Reserve, or just the Fed, is the central bank of the United States. Its daily grind is to keep the economy from veering off a cliff or overheating like a meme stock on WallStreetBets. The Fed is currently headed by Jerome Powell, or Jay Powell, or even JPow if you’re cool enough, and serves a dual mandate of maximum employment and stable prices. For about a year, markets have been building up the conviction that the Federal Reserve should start thinking about cutting rates. But for months, the Fed didn’t even think about talking about cutting rates as a flurry of economic indicators was more or less suggesting that one slash might be a good idea. And now markets fear it may be too late for that. The steep drop in the employment figure for July suggested that the economy has started to crack under the pressure of interest rates sitting at a 23-year high of 5.50%. When rates are high they make borrowing more expensive and discourage businesses and consumers from taking out loans to run their lives better. Instead, they shove their cash in deposit accounts and generate passive, risk-free yield. In a nutshell, high rates = economic contraction; low rates = economic expansion. When rates stay higher for longer, the Fed runs the risk of tilting the economy into the very recession it is fiercely trying to avoid. Talk About Bad Timing The timing for that jobs data couldn’t have been more inconvenient. July’s nonfarm payrolls arrived just two days after the Fed praised the growth of the economy and voted against reducing its benchmark interest rate. To defend this decision, Chairman Jay Powell said that his clique of top central bankers need more good data that shows inflation is heading down toward the bank’s 2% goal. He also went on to say that he “wouldn’t like to see material further cooling in the labor market.” The press conference after that rate call did end on a high note. The Fed boss noted that an interest rate cut was on the table at the next meeting slated for mid-September. The issue, however, is whether a single 25-basis-point cut, as communicated, will be enough. Markets have already ramped up bets for a juicier 50-basis-point reduction to borrowing costs — a more aggressive monetary policy measure that will provide a stronger lean against a faltering economy. And while the difference between jobs added and jobs expected might be a factor, the severe pullback seems more about investors throwing a tantrum. "You should've cut rates, now deal with our unusually strong reaction as we make a statement," kind of play. The painful scenario where the Fed may have fallen behind the curve shook Wall Street and spread into global markets. Stocks in the US are in a free fall. The tech-heavy Nasdaq Composite slipped into correction territory, dropping 10% from its peak in mid-July. Tech giants , the main driver of the broad-based gains across the major US indexes, are heavily battered. But the selloff is widespread, jolting everything from stocks , to the US dollar to Bitcoin . Add to this an earnings season weighed by investor concerns over spending on artificial intelligence and you’ve got quite a few things to consider before you jump into your favorite stock out there. What Do You Think? Do you think the Fed will trim rates by a bigger 50-basis-point cut in September or even introduce an urgent interest rate cut before their next regular meeting? And are you comfortable betting on beaten-down equities across the board? Let us know your comments below!
SP:SPX
by TradingView
17
Rapid Yield Curve Inversions as Recession Fears RealizedLast week was pandemonium for US Equities, Japanese Equities, Foreign Exchange markets, Cryptocurrency markets, and Bond markets. Yet, for those positioned for the normalization of the yield curve, results are apparent as the curve has officially normalized into positive territory with a sharp recovery on Friday which continued into Monday. The non-farm payroll report highlighted concerns we previously illustrated that a recession is not off the cards yet. In fact, the latest data suggests it may be likely. The Sahm rule, a strong indicator of past recessions, was activated based on the latest jobs data. Given the possibility of a recession in the US, the further steepening of the yield curve remains a compelling opportunity with uncertainty persisting across all areas of the market. This paper provides a hypothetical trade setup in the 10Y-2Y spread to gain exposure to normalization. LATEST JOB REPORT WAS DISMAL WITH LOW JOBS ADDED, RISING UNEMPLOYMENT The Nonfarm payroll report from July showed a meagre 114k jobs added compared to expectations of 176k. Even worse, figures for May and June were revised lower by a cumulative 29k bringing the updated figures well below the initial analyst consensus for these months. Job addition in July was one of the lowest since the pandemic. Moreover, both initial and continuing jobless claims last week rose to their highest level since 2021. Combined effect on the job market was an increase in the unemployment rate to 4.3%, the highest since 2021. The job market is visibly weakening. Though the effect of Hurricane Beryl likely played a role in the dismal jobs report, the details suggest systemic weakening as both hiring and quits fell to their lowest level since 2020. To make matter worse, conditions may worsen even further in the coming months as Intel announced plans to reduce its workforce by 15k at its most recent earnings. JOBS REPORT TRIGGERS SAHM RULE The Sahm rule is a recession indicator used to identify early signals of a recession. It measures the difference between the current unemployment rate relative to the lowest three-month average in the last 12 months. According to the Sahm Rule, a recession could be on the hoirzon when this value rises above 0.5, Currently, the indicator is at 0.53. It is a highly accurate indicator, proven to be reliable through the last 12 recessions when the indicator was at present values. While no indicator is completely accurate and past results do not guarantee future performance, the accuracy of the indicator should not be ignored. RATE CUT EXPECTATIONS SURGE As a result of the dismal jobs report, rate cut expectations have surged, largely due to expectations that the Fed will be forced to cut rates rapidly in response to a faltering economy. For reference, at the September policy meeting, FedWatch signals a >90% probability of 50 basis point cuts. Just 1 week ago, FedWatch suggested a 10% probability for that decision. Source: CME FedWatch Markets are also expecting a 50-basis point cut at the November meeting followed by a 25-basis point cut at the December meeting for a cumulative cut of 125 basis points in 2024. Source: CME FedWatch BOND MARKETS IN TURMOIL BUT YIELD SPREAD SURGED Due to the rapid reversal in sentiment, US treasury yields have fallen sharply. 2Y yield is 15% lower over the past week. 10Y yield has declined by 10% and 30Y yield has fallen by 8%. On Friday, the decline in 2Y yield was the sharpest since 13/December when the Fed policy projections suggested up to six rate cuts in 2024. This time around, the decline in bond yield has been driven by market fears of a recession which may force the Fed to cut rates rapidly. While the yields have declined sharply, yield spreads have surged. The 10Y-2Y spread has increased by 27 basis points over the past week with a 10-basis point jump on Friday followed by another 8 basis points increase on Monday. The 30Y-2Y spread has been the strongest performer. It has increased by 63 basis points over the past week. It surged by 29 basis points on last Friday and another 14 basis points on Monday. Both spreads have now normalized as 2Y yield has declined much more sharply than 10Y and 30Y yield. The normalization has brought to end the longest yield curve inversion in history that lasted more than two years. This is not unexpected as highlighted by Mint Finance in a previous paper . The yield spread tends to normalize long before a recession actually arrives. However, the spread may rise further. According to historical levels of the 10Y-2Y spreads at the start of previous recessions, there is between 15 and 100 basis points of further upside. The potential for upside is even higher on the 30Y-2Y spread although in 1989, the level was lower than the current level suggesting the risk of a decline. LONG 10Y SHORT 2Y ON FURTHER NORMALIZATION While the movements in the yield spreads over the past week have been enormous, there is a potential for further increase. Recession signals are flashing red. Equity markets are in turmoil. Fed may be forced to reduce rates to support a weak job market. Rapid rate cuts and a recession support further steepening of the yield curve. Historical performance of yield spreads prior to recessions suggests the yield curve may continue to steepen at a rapid rate. We had previously suggested the 30Y-2Y spread as a superior instrument to express views on this normalization. However, the 30Y-2Y spread has surged by 63 basis points in the past week. While it may continue to rise even further, there is a risk that markets have exhausted much of the upside. A position on the 10Y-2Y spread offers potentially higher upside. The 10Y-2Y spread is just above the level of 0 indicating the potential for further recovery. The current 10Y-2Y spread level is far below the levels at the start of previous recessions. Investors can seize opportunities from normalization in the 10Y-2Y spread using CME Yield futures. The CME Yield futures are quoted directly in yield with a one basis point change in the yield representing a P&L of USD 10. The below hypothetical trade setup consisting of long 10Y yield futures and short 2Y yield futures expresses a view on the further steepening of the yield spread with a reward to risk ratio of 1.3x. Entry: 3.7 Target: 27.8 Stop Loss: -15 Profit at Target: USD 241 ( (27.8 – 3.7) x 10 = 24.1 x 10) Loss at Stop: USD 187 ( (-15 – 3.7) x 10 = -18.7 x 10) Reward to Risk: 1.3x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CBOT_MINI:10Y1!Long
by mintdotfinance
Levels discussed on livestream 5th August 5th August DXY: Trading lower to 102.55, beyond that, could test 102 round number support level. NZDUSD: Buy 0.5930 SL 20 TP 50 AUDUSD: See reaction at 0.6465, RBA decision pending, Sell 0.6455 SL 20 TP 60 USDJPY: Look for retracement to complete (retest 144), Sell 143.50 SL 70 TP 250 GBPUSD: Buy 1.2870 SL 20 TP 70 EURUSD: Buy 1.1010 SL 20 TP 50 USDCHF: Sell 0.8540 SL 40 TP 85 USDCAD: Sell 1.3825 SL 20 TP 40 Gold: Needs to stay above 2410, break 2450 to retest 2480 resistance
TVC:DXY
by JinDao_Tai
Economic Recession?----BTCThe market saw a massive pullback following Friday's employment data. Not just crypto, but almost all risk assets fell. U.S. employment data in July showed that the employment situation has deteriorated. After that, the interest rate swap market priced in the Federal Reserve to cut interest rates by 50bp in September. This did not bring about a pump, on the contrary, the market began to price in a recession. Stocks and crypto both fell, but gold did not rise further on recessionary factors, indicating that there is still disagreement about recession. Judging from past history, the Federal Reserve held an interim meeting in March 2020 to cut interest rates to combat the recessionary impact of Covid-19. So we believe that the current economic situation is still under the control of the Fed, and if it gets out of control, there will be an interim meeting. Back to market performance. Based on the listing of BTC ETF, BTC is the most stable token in the cryptocurrency market, but it also suffered a drop of nearly 20% over the weekend and penetrated the low in early July. The bears has significant power. At the 4h level, the TSB indicator prompted a SELL signal on August 1, after which BTC began a downward trend. If you had opened a short position based on the TSB indicator at that time, you would have made a gain of over 15%, without any leverage. Introduction to indicators: Trend Sentinel Barrier (TSB) is a trend indicator, using AI algorithm to calculate the cumulative trading volume of bulls and bears, identify trend direction and opportunities, and calculate short-term average cost in combination with changes of turnover ratio in multi-period trends, so as to grasp the profit from the trend more effectively without being cheated. KDMM (KD Momentum Matrix) is not only a momentum indicator, but also a short-term indicator. It divides the movement of the candle into long and short term trends, as well as bullish and bearish momentum. It identifies the points where the bullish and bearish momentum increases and weakens, and effectively capture profits. Disclaimer: Nothing in the script constitutes investment advice. The script objectively expounded the market situation and should not be construed as an offer to sell or an invitation to buy any cryptocurrencies. Any decisions made based on the information contained in the script are your sole responsibility. Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.
by sypool-AI-TradeGenius
Is the crash here?Throughout all of social media and YouTube I've been seeing many people panicking if weather or not we have topped and should start selling. One thing that I've learned predicting mayor world events is to: always play it on the safe side when dealing with uncertainty. Instead of shorting the market, I prefer reducing my exposure, as short trades are extremely risky, and I've personally learned that the hard way. It is true that price action is now at an infliction point. With a vast amount of stocks entering a downtrend in such a harsh manner. It is not hard to see why everyone is panicking. Do I think this is the crash we've been waiting for? Perhaps it is, but I can't tell with certainty because even tough price is over extended, it does have a lot of structure supporting it. The reason we are at an infliction point is due to the price action reaching the 25MA which many times is used as support or resistance and going below this threshold would for sure confirm a downtrend and with my Mean Returns indicator the story is the same. We are seeing a loss in momentum after having a very bullish push in the last years. With all the recent news in the U.S. election, it is fascinating to see the market react to these mayor events. These do change the scope of how the market should behave, as a lot of uncertainty has just been introduced to the U.S. population in general. This lack of knowing what the future hold in store is what I believe to be the driving force of this recent downtrend. Combined with increasingly worsening economic fundamentals is what will give us the crash we are waiting for. But before making a decision on how to trade, it's important to consider all possible outcomes. Which is exactly what you can see in the graph. Where I've marked what different price action would mean to the economy and the market in general, as well as setting a trading plan for all of these outcomes. This type of panicking is what leads me away from using stop losses. People panic and push prices violently. However, many times the analysis was correct from the start but hitting a stop loss gets you to close your position prematurely. That's why I define several entry levels and dollar cost average since the beginning. Using an equation to determine how much should I invest, at which levels to determine the correct amount of exposure to avoid missing out and to always have a favorable average price.
CME_MINI:ES1!
by DarkMessiah777
VIX $2.9 Trillion wiped on recession fears. Is the worst over?The much lower than expected Nonfarm Payrolls today (114k against a 176k forecast) amplified the global recession concerns and wiped out $2.9 trillion from the stock markets, making it the worst day since the 2020 COVID crash. With Nasdaq down almost -12% from its recent peak, investors are more or less convinced of the necessity of a September Fed Rate cut in order to restore confidence in the market. But is the worst over yet? Well, lets take a look at the Volatility Index (VIX), which last time we analyzed it (April 16, see chart below), helped us take the most optimal buy entry on the stock market as it got rejected right at the top of its 10-month Channel Down: Today VIX was up almost +90% from its daily Low, displaying enormous market volatility. It is useful in times like these to look at the multi-year price action in order to keep an objective technical perspective. As this 1W chart shows, a VIX price this high is a rare feat since the 2008 Housing Crisis. In fact the break-out above the Channel Down resembles the Highs of December 24 2018 and October 13 2014 (blue circles). Those that been the lowest levels of alerts on the VIX scale, with the medium ones being the orange circles and the worst ones being the red (only happened twice: October 20 2008 and the COVID crash of March 16 2020). At the same time, the 1W RSI just broke above the 70.00 Overbought barrier, which has only happened another 6 times since the 2008 Housing Crisis. It is easy to understand as a result, that this VIX spike has more chances to be corrected in the coming weeks than ending up in a larger stock market correction. On our current chart, the stock market is represented by the S&P500 (black trend-line). As you can see, a strong recovery (green Channel Up) followed after the blue VIX peaks. In the event however that this turns out to be an orange VIX peak next week, the S&P500 is expected to start recovering within 4-6 weeks. Which case do you think it will be? ------------------------------------------------------------------------------- ** Please LIKE 👍, FOLLOW ✅, SHARE 🙌 and COMMENT ✍ if you enjoy this idea! Also share your ideas and charts in the comments section below! This is best way to keep it relevant, support us, keep the content here free and allow the idea to reach as many people as possible. ** ------------------------------------------------------------------------------- 💸💸💸💸💸💸 👇 👇 👇 👇 👇 👇
TVC:VIX
by TradingShot
3
Unemployment, FED Rates, SPXLooks like market bottoms just before the Unemployment peak. Market peaks just before fed starts reducing the rates. At the current situation, we have fed fund rates high and also unemployment started to climb. Will be looking at the unemployment going high and markets roll over and fed cuts rates. if FED keeps the same rate for long, something in the economy will break and they have to reduce the rate and if it happens then it's already too late. Looks like CD's and earning ~5% interest on cash is much better than risking for very limited upside in the market.
FRED:UNRATEShort
by MarathonToMoon
7
A Possible Recession Coming: What to Invest in During DifficultChart Analysis: The chart depicts the relationship between the M2 money supply, US Consumer Price Index (CPI), labor market trends, and historical recessions. Key observations include: Recessions: -Historical recessions are marked and correlated with significant economic downturns. -Each recession coincides with substantial drops in the labor market and fluctuations in the M2 money supply and CPI. M2 Money Supply and US CPI: -The M2 money supply (blue line) shows a steady increase over the years, reflecting ongoing monetary expansion. -The US CPI (orange line) follows a similar upward trend, indicating rising consumer prices and inflation. Current Economic Conditions: -The chart suggests a potential recession on the horizon, marked by the recent economic indicators and historical patterns. Bitcoin's Role in the Current Economic System: This is the reason the goverments wants to stop Bitcoin. People want out of their slave system where they create abundance for themselves with money printing while our labor value is always decreasing. Recession Expectations and Market Opportunities: Be open to a recession in the coming winter. The CME is having a meeting today where there is a 5% chance for a 0.25 rate cut and a 95% chance for a cut in September. Historically, there is a two-month window where the market booms and then rolls over into a recession after rate cuts. This supports the idea of a left-translated cycle and a longer multi-year cycle. For more information, see "The Fourth Turning." Investment Opportunities_ With this information, there can be good opportunities to get in early on investments in the precious metal markets like gold and silver, and also mining stocks. Production materials like copper, oil, and steel can be great shorting opportunities in the coming weeks and months. Conclusion: Understanding these economic indicators and historical patterns provides valuable insights for making informed investment decisions. While the future economic landscape looks challenging, strategic investments in precious metals and shorting opportunities in production materials could offer significant returns.
ECONOMICS:USM2Short
by martinxi5u4
2
A Recession Is Coming - Brace for Impact First things first What is a Recession? A recession is a period when the economy isn't doing well. It means businesses are selling less, people are losing jobs or not getting raises, and overall, there's less money being spent. It's like a slowdown in the economy where things are not growing, and sometimes they shrink. This period of economic decline usually lasts for a few months or longer. Usually, when we have two consecutive quarters of negative Gross Domestic Product (GDP) we say that we are in a recession. Now, let's look at previous recessions to see if we can find some patterns that help us predict the coming one. 😊 This is how you can navigate through the chart: - past recessions are highlighted with orange colored boxes based on the data from "FRED economic data". - The purple line chart shows the US inflation rate. - The US GDP is shown in a green step-line chart. - The US interest rate is shown with an orange line. - The Yellow line chart shows the unemployment rate in the US. - The most important line chart here is the blue one that shows the spread between the 10-year bond yield and the 3-month bond yield (Yes we could also use 2-year instead of 3-month). This blue line, the yield curve, is important to us because it's a reliable indicator that almost every time gave us a heads up for a recession (if you were looking at it of course 😁). When it falls below zero, we call it the inverted yield curve and we hit a recession almost every time it gets back up after spending some time below zero. An inverted yield curve tells us that the market participants are concerned about future economic growth It can lead to tighter financial conditions, reduced lending, and lower consumer and business spending, which can contribute to a downturn in the economy. With that said, take a look at the chart and you can easily spot the repetitive pattern of interest rate hikes/cuts, unemployment rate, and the inverted yield curve just before each recession. With the strong possibility of having the first rate cut in September, and the patterns you see on the chart, can you say that we are going to have a hard landing and a recession? I would say yes. If you say we are not going into a recession and your counter argument is backed by a low unemployment rate and a positive GDP and a declining inflation rate, this chart does not support the idea. I know there are other factors that might support the soft landing scenario, and I would like to have your point of view on this. So, please share your thoughts in comments section if you are reading this post through Tradingview. 😊 For further research, you can pull up the charts of indices like S&P500 or commodities of your choice to see how they moved during each recession. This will help you find some patterns that might assist you in your future investments.
TVC:US10Y
by SamanFx0
A cyclical historyWe have all heard that the economy works in cycles, and so does the market. But what does this truly mean? Has anyone actually been able to show you where you can see these cycles occur? Well, here is a great graph that will show you how. By looking at the 6-month time frame, the percentages of stocks above the 20 daily MA, you are achieving 2 things. Seeing price action at the timeframe used to declare technical recessions Seeing the percentage of stocks in a short term uptrend or downtrend as the complement is also true Here it's quite easy to see how an important world event unfolded with a clear, repeatable pattern. When the percentage oscillates heavily, it allows for many technical resets, causing a healthy uptrend when the percentage returns to above 50% by the end of the semester. Another patter is that after a period of over-performance, a period of under-performance is followed and vice versa. When looking at world events, just remember at the end of the day we are all a number in a larger scheme. And the laws of statistics will end up controlling our outcomes, as there must be balance in all binomial systems. Even when biases can be present in distributions, the more we generalize and zoom out, the more we can see the statistical convergences in human behavior. At the end of the day, our lives are influenced by fractals, some of which we are not even aware exist.
INDEX:MMTWEducation
by DarkMessiah777
Macro View Shows 2-4 Month Max And Then It Starts!Traders, Some rather ominous signs are showing in various markets not least of which includes the U.S. housing market. As you know, we have been periodically tracking the USHMI as a key leading indicator to show us where and when our coming U.S. (perhaps global) recession begins. We are close if we have not already begun, but I imagine there will be no ability for denial in about 2-4 months time. Before then, markets may continue to blow off and I still expect Bitcoin to hit our 85k target. Today we'll review our USHMI chart along with other key charts for further clues mapping future trajectory.
ECONOMICS:USHMIShort
by stewdamus
Navigating Frothy US Equities with S&P SpreadsNavigating frothiness in US equities requires both caution and tact. With the S&P 500 nearing its all-time high amid flashing recession signals, investors must be vigilant with volatility during upcoming earnings season, driven by outsized expectations. This paper explores the persistent recession indicators and forces at play during upcoming earnings. The paper posits a spread trade using CME’s Micro E-Mini futures (Long S&P 500 and Short Russell 2000) to maintain upside potential with reduced downside risk. RECESSION RISKS PERSIST AS RATES REMAIN HIGH On Friday, the PCE Price Index (Fed’s preferred gauge) showed inflation cooling to 2.6% in May, in line with expectations. Price pressures are slowly abating. Numbers aside, the broader economic landscape presents a complex picture. Signals from the job market point to unemployment claimants at a record high for the past two and a half year with job openings shrinking drastically. Personal earnings were higher than anticipated in May (0.5% vs 0.4%), but spending was below expectations. Consumers are being more cautious. Mint Finance covered these nuances in a previous paper . Housing is flashing weakness as new housing starts hit a four-year low in May. Soaring prices and steep mortgage rates are weighing on demand. The Fed’s policy path remains unconfirmed. However, consensus point to a rate cut as early as September. Even if that happens, rates are expected to decline gradually. Source: CME FedWatch Despite risk of recession, the S&P 500 has had an exemplary showing this year, trading near their all-time high. YTD performance of 15% in 2024 has been far higher than the 74-year average of 4%. Yet, the performance has been increasingly top-heavy. Nvidia, Apple, and the rest of the tech titans have contributed much of the gains in the broad S&P500 index as it is market cap weighted. The index is heavily reliant on and sensitive to the performance of these mega-caps. The equal-weighted S&P 500 index is up only by 4% in sharp contrast. The spread between the S&P 500 and its equal-weighted counterpart is near its highest point since 2008. The spreads between the S&P 500 and both the Russell 2000 and S&P Midcap indexes have reached multi-decade highs. Outperformance was re-affirmed after the recent earnings season. Mega-caps crushed EPS and revenue expectations and reported phenomenal guidance while other stocks, especially utility and energy sector reported revenue and EPS figures below estimates according to FactSet report . Rallies in mega-cap stocks are being driven by idiosyncratic tailwinds, such as advancements in AI. Meanwhile, slowing consumer spending in the US is raising concerns for the broader market. RISK OF SHARP CORRECTION WARRANTS SPREAD POSITION According to FactSet , Q1 earnings season was positive. Only 19% of firms reported earnings below expectations. Actual average EPS YoY growth for the index was 5.9% (above 3.4% expected as of March 31). Frothiness in the equity market is palpable. Consistent outperformance by mega caps is baked into investor expectations. Strong earnings are already factored into prices, as evidenced by the S&P 500's P/E ratio of 28.38x (far higher than the 10-year average of 20x translating to a 42% above average earnings expectations). Average P/E ratio in the best performing tech sector is even higher at 37.47x. Even minor shortfalls in guidance or revenue/earnings can lead to significant corrections in such a climate. The FactSet reports that 31.8% of firms which beat earnings EPS estimates by up to +5% saw average price decline of -0.9%. Source: FactSet Research In fact, overall, positive earnings only drove a 0.9% increase in price (1% 10Y historical average) while a negative earnings report led to 2.8% drop (-2.3% 10Y historical average). Source: FactSet Research Market frothiness elevates risk of a sharp price correction in single names during Q2 earnings. Analysts are concerned as expectations for Q2 EPS YoY growth have been lowered from 9% on 31/March to 8.8% as of 22/June. Despite this, mega-caps remain in solid position. Robust demand for AI, buoyant advertising revenue, globalized revenue streams, and substantial market dominance have positioned them to continue growing at a disproportionate rate. In case the upcoming Q2 results pan out similarly to Q1 in favor of mega-caps, the S&P 500 will continue to outperform the broader market indices. HYPOTHETICAL TRADE SETUP The S&P 500, with its high concentration of mega-cap stocks, is likely to perform better than broader market indices in the coming earnings season. However, recession signals are also flashing. The S&P 500 does not perform well during recessions. Over the last four recessions, it has declined an average of -14%. Comparatively the spread between S&P 500/Russell 2000 spread has increased 1.7%. The S&P 500/Russell 2000 spread has also outperformed during the six-month preceding recessions. Given the S&P 500-Russell 2000 spread's historical outperformance during recessions, a spread position presents less downside risk compared to an outright long position in the S&P 500. This strategy also maintains a bullish outlook on the top-heavy S&P 500's potential to outperform in the upcoming season. Moreover, the spread trade preserves the upside potential in the ongoing rally, as its performance has been comparable to an outright long position in the S&P 500. A view on the spread between the S&P 500 and Russell 2000 can be expressed using CME Micro E-Mini Equity futures. At 1/10th the size of the full-size E-mini futures, the Micro contracts allow for smaller trades with more granular exposure. A long position in the Micro E-Mini S&P 500 futures expiring in September (MESU2024) can be offset by a short position on 2 x Micro E-Mini Russell 2000 futures expiring in September (M2KU24). This position is highly margin-efficient as CME offers margin credit for this spread. Hypothetical trade set up in summary requires entry at 2.69x, with a target at 2.78x coupled with stop loss at 2.6x. The simulated payoffs are described below. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:MESU2024Long
by mintdotfinance
4
6 INEVITABLE Stock Market DownturnsIn the world of stock trading, and crypto trading, volatility is as much a part of the landscape. Whether you’re a day trader or a long-term investor you’re bound to undergo different degrees of stock market downturns, drops and crashes. And each level of downturn has its own set of characteristics, challenges, and strategies for recovery. Let’s dive into the nuances of market downturns, so you can navigate these stormy waters with confidence and savvy. DOWNTURN #1: Down -2%: A Ripple of Volatility Think of a -2% drop in the stock market as your morning coffee spilling over a bit—it’s unpleasant but hardly the end of the world. This level of decline is typically seen as a blip of volatility, a common occurrence in the stock markets that often corrects itself in the short term. DOWNTURN #2: Down -5%: The Pullback Perspective When the market drops by 5%, it’s is often referred to as a pullback and, while it might cause a bit of concern. However, if you look at the bigger time frame, you’ll see it might not signify a long-term trend. DOWNTURN #3: Down -10%: Entering Correction Territory A 10% drop is a clear signal that the market is in a correction phase. This is where the uptrend will come to a temporary halt and the market will drop and correct itself. You’ll see moving averages will cross down and the medium term trend will be showing downside. You’ll also most likely look for shorts (sells) and take advantage of the correction. DOWNTURN #4: Down -20%: The Bear Market Looms Now we’re in the territory of the bear market. This is generally characterized by a 20% or more drop. It might be time to look into more defensive stocks or sectors, such as utilities or consumer staples, which tend to be less affected by economic downturns. DOWNTURN #5: Down -50%: The Market Crash Crisis A 50% plunge is the equivalent of a financial earthquake, causing widespread panic and uncertainty. It’s quite rare, but when it happens, it’s all hands on deck. We saw this in the financial crisis. We saw this during the tech bubble. We saw this with the oil crisis. Silver Linings: Even in the darkest times, opportunities can be found. And whenever we’ve had a crash with world markets, they have turned up, made a come-back and moved to all time highs. DOWNTURN #6: Prolonged downside: The Depression This one I don’t have a number for you. Unlike recessions, which are typically shorter and less severe, depressions are rare and can last for several years, causing long-term damage to a country’s economic health. The most famous example is the Great Depression of the 1930s, which started with the stock market crash in 1929 and lasted for about a decade in most countries. During this period, unemployment rates soared, reaching as high as 25% in the United States, while industrial production, prices, and incomes plummeted. Conclusion: Steady as She Goes As I like to say. It’s important to know that the downtrends, downturns and downside will come. We need to be clued up and prepare for these situations. That way we’ll take advantage as traders of what to do. With the right approach, you can not only survive these downturns but emerge stronger and thrive profitably on the other side.
TVC:SA40Education
by Timonrosso
Unemployment & The Coming RecessionOnce the Unemployment Rate crosses the 36 mo MA this has historically marked a period of a coming Recession. As you can tell from the RSI indicator we entered into this phase a few months ago. I'm posting this chart because tomorrow Biden is going to tell everyone how great the Economy is doing (wait for it), but the Unemployment Chart indicates we have officially moved into the "Recession" category and there is nothing on the horizon that says this situation is going to be improving, in fact, millions of illegal aliens now flooding into the country indicates the situation will be getting much worse. Banks will begin seizing a record number of properties in foreclosures and bankruptcies as the Unemployment Rate continues upward thanks to the plans they implemented. These periods of "Boom and Bust" are completely fabricated through the policies they implement. There is no reason why this chart shouldn't be mostly a steady line with minor hills and valleys in what would be considered a growing and healthy economy. Also note the Unemployment Rate has never returned back to it's 1972 levels following the removal of the Gold Standard in 1971 by Nixon.
FRED:UNEMPLOYShort
by cldx
Yield Curve Inverts Further on Rising Recession Risk As the tides of economic fortune ebb and flow, a spectre of recession looms over the horizon, whispering in the rustling of Treasury yields and the shifting sands of macroeconomic indicators. Recent economic data has painted a complex tableau of financial uncertainty. From declining PMI figures to a palpable deceleration in GDP growth, the economic forecast has shifted, stirring speculations that Fed may be forced to cut rates should the US economy slip into recession. Uncertainty around the timeline of rate cuts plus a potential looming recession are causing the yield curve to invert once more. Investors can obtain exposure using CME yield futures with a reward to risk ratio of 1.6x. RECESSION SIGNALS ARE FLASHING AGAIN Monetary policy winds are starting to shift once more. Recent economic data, including PMI figures, and a sharply weaker GDP in the US have led participants to increase their expectations that the US Federal Reserve (“Fed”) will have to relent and cut rates in 2024. Source: CME FedWatch Over the past month, probability of a rate cut at 7/Nov policy meeting has increased from 42% to 47%. More notably, the probability of a second rate cut at the 18/December policy remains slightly elevated over the past week at 35%. Typically, rate cuts suggest that the Fed is nearing its dual goals of maximum employment and stable prices. However, current expectations for rate cuts may stem from distinct reasons. Inflation remains persistent. Fed officials remain steadfast in their battle against inflation. But inflation is stalled at 3%. Higher rates are instead starting to impact economic growth. As rates remain high, the odds of an economic slowdown rise. On 4/June, job openings in the US fell to their lowest level in three years. On 31/May, the Chicago PMI indicator fell sharply into what is a recession territory. Q1 GDP was revised lower last month. Weak consumption data from the US has led to expectations that GDP growth during Q2 may remain slow. On a similar note, the household jobs survey showed full-time employment declining by 625k in May while part-time employment rose by just 286k. However, not all jobs’ data was negative. The establishment jobs survey showed strong job creation at 272k far higher than expectations of 182k. Additionally, wage growth was above expectations as weekly average earnings rose 0.4% compared to 0.2% in April. The household survey counts each individual only once, regardless of how many jobs they have. In contrast, the establishment survey counts employees multiple times if they appear on more than one payroll. Many observers have been calling for a recession in the US ever since the Fed raised rates to their highest level in 23 years. Yet the US economy has remained robust. Part of the reason behind the resilience has been the savings cushion that US consumers built up during the pandemic. However, with the strong inflation during the past year, most of that cushion has been spent. Consumers have already started to shift their consumption habits and credit usage (and delinquency) has been on the rise. Credit card delinquencies are at the highest level in more than a decade and personal savings built up during the pandemic have been exhausted. ECONOMIC DATA DRIVES BOND YIELDS LOWER AND RE-INVERTS YIELD CURVE Throughout the past 10 days, economic releases in the US have driven bond yields consistently lower. Recent non-farm payrolls data drove a rally in yields. Economic releases have also driven a decline in the yield spreads resulting in further inversion of the yield curve. Since the release of the PCE price index and Chicago PMI on Friday 30/May, the 10Y-2Y spread has declined by nine basis points. The 30Y-2Y spread has performed the worst since then as it stands ten basis points lower. Further, unlike the uptick in yields following NFP, the yield spreads continued to invert further, especially for the 30Y-2Y and 10Y-2Y spread. HYPOTHETICAL TRADE SETUP Historically, the yield spread between 10-year and 2-year Treasuries tends to normalize by the time a recession officially hits the US. Based on current trends, a recession, as indicated by GDP metrics, might not occur until early next year. Currently, the yield curve is deeply inverted, and recession signals are intensifying. Moreover, the possibility of a rate cut remains uncertain. This ongoing uncertainty about the policy direction is further exacerbating the inversion of the 10Y-2Y spread. Another factor to consider is the upcoming US elections. As the Fed strives to remain an independent authority, they may opt to avoid major policy moves before elections are concluded. This week is set to bring several key economic updates, including the May CPI report and the Federal Reserve's revised economic projections. These projections are expected to reveal that rate cuts, previously anticipated for 2024, might be delayed further. The volatility in economic data has made it challenging to assess the yield trends. Despite a general rise in yields, the yield curve continues to invert, particularly the 30Y-2Y spread, which has been the most adversely affected. This reflects ongoing investor concerns about long-term Treasuries as expectations for rate cuts are pushed further into the future. Source: CME CurveWatch Investors can obtain exposure to a further inversion in the 30Y-2Y spread using CME Yield futures. CME Yield futures are quoted directly in yield with a one basis point change in the yield representing a P&L of USD 10. As yield futures across various maturities represent the same notional, spread P&L calculations are equally intuitive with a one basis point change in the spread between two separate maturities also equal to USD 10. The hypothetical trade setup using the 30Y-2Y spread is described below. • Entry: -36.5 basis points (bps) • Target: -50 bps • Stop Loss: -28 bps • Profit at Target: USD 135 (13.5 bps x USD 10) • Loss at Stop: USD 85 (8.5 bps x USD 10) • Reward to Risk: 1.59x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CBOT_MINI:30Y1!Short
by mintdotfinance