TheEtoroProject
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𝐌𝐀𝐑𝐊𝐄𝐓 𝐂𝐑𝐔𝐒𝐇: 𝐂𝐎𝐌𝐏𝐀𝐑𝐀𝐓𝐈𝐕𝐄 𝐀𝐍𝐀𝐋𝐘𝐒𝐈𝐒 𝐎𝐅 𝐇𝐈𝐒𝐓𝐎𝐑𝐈𝐂𝐀𝐋 𝐊𝐏𝐈𝐬 Given the current relevance of the topic, I conducted an analysis to spark a discussion about the upcoming market movements. 📈 𝐇𝐘𝐏𝐎𝐓𝐇𝐄𝐒𝐈𝐒 The main hypothesis is that there are some common levels of KPI shared across all major crises of the last 20 years that signal an imminent market downturn. 𝐓𝐇𝐄 𝐊𝐏𝐈𝐬 The KPIs identified as indicators of these conditions are as follows: 𝐏/𝐄 𝐑𝐚𝐭𝐢𝐨: This is the price of stocks compared to company earnings. When it's very high, it suggests that stocks are expensive compared to what companies actually earn, often indicating a market bubble. In these cases, a downturn can happen if companies don’t meet expected earnings. 💸 𝐁𝐮𝐟𝐟𝐞𝐭𝐭 𝐈𝐧𝐝𝐢𝐜𝐚𝐭𝐨𝐫: This ratio compares the total value of the stock market to the country's economy (GDP). When it's much higher than normal, it suggests that stocks are overvalued compared to economic output, signaling a risk of a market correction since prices may not be sustainable. 📊 𝐘𝐢𝐞𝐥𝐝 𝐂𝐮𝐫𝐯𝐞: Normally, long-term interest rates are higher than short-term rates. When the curve inverts (short-term rates exceed long-term ones), it often reflects the actions of central banks, which may raise short-term interest rates to fight inflation. This inversion indicates that market participants expect slower economic growth or potential future rate cuts as central banks adjust their policies. Historically, such patterns have preceded recessions. 📉 𝐕𝐈𝐗: Known as the "fear index," the VIX measures expected volatility in the stock market. When the VIX spikes, it reflects high uncertainty, often seen just before or during market downturns as investors brace for instability. 😨 𝐌𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐏𝐌𝐈: This index measures economic activity in manufacturing. A PMI below 50 signals contraction in this sector, often a precursor to a wider economic slowdown if prolonged. 𝐓𝐇𝐄 𝐕𝐀𝐋𝐔𝐄𝐒 I have identified a common threshold for the KPIs mentioned above by examining their values during the peaks immediately preceding all market drawdowns (S&P 500) of over 19% in the last 20 years and entered this value in the “Crisis Risk Threshold.” I have identified the most recent actual values for the KPIs available as of October 29, 2024, and entered them in the “Most Recent Value” column. I have determined the historical average for all the mentioned KPIs and entered it in the “Historical Average” column. I summarized everything in the attached table. 📋 𝐍𝐎𝐓𝐄𝐒 𝐅𝐎𝐑 𝐓𝐇𝐄 𝐃𝐈𝐒𝐂𝐔𝐒𝐒𝐈𝐎𝐍 The current economic signals suggest potential trouble ahead since the stock market is overpriced (especially for tech stocks - $NSDQ100 compared to both the Crisis Risk Threshold and historical values, and there are signs of slowing growth. Even though people aren't too worried right now (as shown by the VIX), the inverted yield curve and weak manufacturing raise concerns about a recession. ⚠️ It's worth mentioning that total loans and leases in U.S. banks have shown steady growth since June. This increase indicates that banks are continuing to lend, reflecting cautious optimism in borrowing despite ongoing economic uncertainties. Before the 2008 and 2018 crises, the policies were more aggressive. Interestingly, in almost all previous drawdowns, the Manufacturing PMI indicated a strongly expanding market. In this case, however, we are already below the threshold level between expansion and contraction (50). Regarding technical indicators, today the $SPX500 is in overbought territory, with consistently declining highs. Volumes are clearly decreasing. The ADX (which indicates trend strength, in this case bullish) is also clearly falling. It is noted that at the peak in December '21, the ADX was 14, while today it is still at 21. 📉 𝐒𝐏𝐄𝐂𝐔𝐋𝐀𝐓𝐈𝐎𝐍𝐒 As we know, the stock market is often overvalued. The key point is that the level of overvaluation is similar to many peaks preceding significant past drawdowns. Of course, the upcoming U.S. elections and the completion of the 13F filings by hedge funds on November 15 will be very important to understand the direction investments have taken in Q3. These events could trigger volatility. Personally, I believe Trump will win, and his election, thanks to his pro-corporation political agenda, will support market value in the short term, albeit slightly. Once this is factored into prices, the market will then have the psychological boost of a year-end rally. 🎉 All of this will keep the $SPX500 in overbought territory, which will increasingly result in it being overpriced with a weakening bullish trend. We will reach the beginning of the year, and the final earnings releases will be crucial as they could trigger the start of a drawdown. 📅 And you, what do you think? 🤔 @cfigueroa1982 tag you as shared. *AI use: - Text correction - Data retrieval
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