Are there advantages to using leveraged exchange-traded funds (ETF) to implement conventional asset class exposures? In their October 2018 paper entitled “A Portfolio of Leveraged Exchange Traded Funds”, William Trainor, Indudeep Chhachhi a…
Good morning, it’s Paul here!
I trust that everyone’s Christmas break was enjoyable. The press reported that about a third of the UK population intended heading into town amp; city centres for the Boxing Day Sales. It will be fascinating to see the for…
Everyone wants to know if this selloff has reached a low or bottom yet and what to expect over the next 30 – 60+ days. Since October, the U.S. stock market has reacted to the U.S. Fed raising rates above 2.0% with dramatic downward price moves. The latest raise by the U.S. Fed resulted in a very clear price decline in the markets illustrating the fact that investors don’t expect the markets to recover based on the current geopolitical and economic climate.
Over 5 years ago, our research team developed a financial modeling system that attempted to model the U.S. Fed Funds Rate optimal levels given certain inputs (US GDP, US Population, U.S. Debt, and others). The effort by our team of researchers was to attempt to identify where and when the U.S. Fed should be adjusting rates and when and where the U.S. Fed would make a mistake. The basic premise of our modeling system is that as long as Fed keeps rates within our model’s optimal output parameters, the U.S. (and presumably global) economy should continue to operate without massive disruption events unless some outside event (think Europe, China or another massive economic collapse) disrupts the ability of the U.S. economy from operating efficiently. We’ve included a screen capture of the current FFR modeling results below.
This model operates on the premise that U.S. debt, population, and GDP will continue to increase at similar levels to 2004-2012. We can see that our model predicted that the U.S. Fed should have begun raising rates in 2013-2014 and continued to push rates above 1.25% before the end of 2015. Then, the U.S. Fed should have raised rates gradually to near 2.0% by 2017-2018 – never breaching the 2.1250% level. Our model expects the U.S. Fed to decrease rates to near 1.4 – 1.5% in early 2019 and for rates to rotate between 1.25%~2.0% between now and 2020. Eventually, after 2021, our model expects the US Fed to begin to normalize rates near 1.5-1.75% for an extended period of time.
Additionally, our Custom Market Cap index has reached a very low level (historically extremely low) and is likely to result in a major price bottom formation or, at least, a pause in this downward price move that may result in some renewed forward optimism going forward. Although we would like to be able to announce that the market has reached a major price bottom and that we are “calling a bottom” in this move, we simply can’t call this as a bottom yet. We have to wait to see if and when the markets confirm a price bottom before we can’t attempt any real call in the markets. You can see from our Custom Market Cap Index that the index level is very near historically low levels (below $4.00 – near the RED line) and that these levels have resulted in major price low points historically. We are expecting the price to pause over the next week or so near these $3.50 levels and attempt to set up a rotational support level before attempting another price swing. As of right now, we believe there is fairly strong opportunity for a price bottom to set up, yet these are still very early indicators of a major price bottom and we can’t actually call a bottom yet. If our Custom Market Cap Index does as it has in the past, then we are very close to a bottom formation in the US markets and traders would be wise to wait for technical confirmation of this bottom before jumping into any aggressive long trades.
Lastly, our Custom Global Market Cap Index has also reached levels near the lower deviation channel range over the past 7+ years, which adds further confidence that a potential price bottom may be near to forming in the US markets. As we can see from the chart below, the recent selloff has pushed our Global Market Cap Index to very low levels – from near $198 to near $144; a -27.55% total price decline. Nearing these low levels, we should expect the global markets to attempt to find some support and to potentially hammer out a bottom, yet we are still cautious that this downward price move could breach existing support levels and push even further in to bear market territory.
There are early warning signs that the market may be attempting to form a market bottom and our research team is scanning every available tool we have at out disposal to attempt to assist all of our members and followers. We alerted you to this move back on September 17, 2018 with our ADL predictive modeling system call for a -5 – 8%+ market correction. Little did we know that the U.S. Fed would blow the bottom out of the markets with their push to raise rates above the 2.0% level.
As the U.S. Fed has already breached our Fed Modeling Systems suggested rate levels, the global markets will be attempting to identify key price support in relation to this new pricing pressure and the expectations that debt/credit issues will become more pronounced as rates push higher. In other words, the global markets are attempting to price in the renewed uncertainty that relates to the U.S. Fed pushing rates beyond optimal levels. We expect the markets are close to finding true support near the levels we’ve shown on our Custom Index charts, yet we still need confirmation before we can call it a bottom.
We will continue to update you with our research and analysis as this move plays out and we hope you were able to follow our analysis regarding the Metals, Oil, Energy and other sectors that called many of these massive price swings. We pride ourselves on our analysis and ability to use our proprietary tools to find and execute successful trades for our members. Our ADL predictive price modeling system is still suggesting an upward price move is in the works for the U.S. markets and we are waiting for our “ultimate low price” level to be reached before we expect an upside leg to drive prices higher again. Based on our current research, we may be nearing the point where the markets attempt to hammer out a price bottom – yet time will tell if this is the correct analysis.
Please take a minute to visit The Technical Traders to learn how we help our members find and execute better trades. Recent swings in the markets have made it much more difficult for average traders to find and execute successful short term trades. Learn how we can help you find greater success and read some of our recent research posts by visiting our Free Research section of the Technical Traders.
2018 was a rough year for financial stocks but these five companies gained against the trend.
The ES (S&P e-mini contracts) broke the support level from the February 2018 lows immediately after the US Federal Reserve announced a 25 bp rate hike this week. This breakdown below the February 2018 lows is concerning because it indicates that previous support is not holding and we could be in for further downside price activity.
We are preparing a detailed research post for early next week regarding a broad range of US markets as well as how our proprietary price modeling systems are reflecting this recent price move. What we can suggest to all investors is play small positions at the moment and prepare for increased volatility. There is near term support that may come into play soon, but overall the markets are reacting to a deleveraging event that could see prices push below 2400 before finding true support.
Visit The Technical Traders to read all of our recent research posts and see what we believe will be the big movers in 2019.
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