Luca Minici
Luxembourg
๐Œ๐€๐‘๐Š๐„๐“ ๐‚๐‘๐”๐’๐‡: ๐‚๐Ž๐Œ๐๐€๐‘๐€๐“๐ˆ๐•๐„ ๐€๐๐€๐‹๐˜๐’๐ˆ๐’ ๐Ž๐… ๐‡๐ˆ๐’๐“๐Ž๐‘๐ˆ๐‚๐€๐‹ ๐Š๐๐ˆ๐ฌ Given the current relevance of the topic, I conducted an analysis to spark a discussion about the upcoming market movements. ๐Ÿ“ˆ ๐‡๐˜๐๐Ž๐“๐‡๐„๐’๐ˆ๐’ 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. ๐“๐‡๐„ ๐Š๐๐ˆ๐ฌ The KPIs identified as indicators of these conditions are as follows: ๐/๐„ ๐‘๐š๐ญ๐ข๐จ: 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 donโ€™t meet expected earnings. ๐Ÿ’ธ ๐๐ฎ๐Ÿ๐Ÿ๐ž๐ญ๐ญ ๐ˆ๐ง๐๐ข๐œ๐š๐ญ๐จ๐ซ: 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. ๐Ÿ“Š ๐˜๐ข๐ž๐ฅ๐ ๐‚๐ฎ๐ซ๐ฏ๐ž: 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. ๐Ÿ“‰ ๐•๐ˆ๐—: 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. ๐Ÿ˜จ ๐Œ๐š๐ง๐ฎ๐Ÿ๐š๐œ๐ญ๐ฎ๐ซ๐ข๐ง๐  ๐๐Œ๐ˆ: 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. ๐“๐‡๐„ ๐•๐€๐‹๐”๐„๐’ 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 โ€œCrisis Risk Threshold.โ€ I have identified the most recent actual values for the KPIs available as of October 29, 2024, and entered them in the โ€œMost Recent Valueโ€ column. I have determined the historical average for all the mentioned KPIs and entered it in the โ€œHistorical Averageโ€ column. I summarized everything in the attached table. ๐Ÿ“‹ ๐๐Ž๐“๐„๐’ ๐…๐Ž๐‘ ๐“๐‡๐„ ๐ƒ๐ˆ๐’๐‚๐”๐’๐’๐ˆ๐Ž๐ 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. โš ๏ธ 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. ๐Ÿ“‰ ๐’๐๐„๐‚๐”๐‹๐€๐“๐ˆ๐Ž๐๐’ 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. ๐ŸŽ‰ 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. ๐Ÿ“… And you, what do you think? ๐Ÿค” @cfigueroa1982 tag you as shared. *AI use: - Text correction - Data retrieval
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