Posts

Why Goldman Sachs Thinks a Stock Market Crash Might Be Coming Soon

Source: CNBC

“Financial market reconciliation lies ahead…”We are approaching the point of maximum optimism and the S&P 500 will give back recent gains…” – Mr. David Kostin, Goldman’s chief U.S. Equity Strategist

While the S&P 500 continues to break new highs, prominent economics and C-level staff in multinational banks are coming out to say it’s time it has to stop.

 

U.S Equities are at Extreme Highs

As the old adage goes, “what comes up, must come down”. However, this adage has a valid explanation in the world of stock trading. Prices that go up must come down eventually because at some point there will not be any more buyers in the market, buyers would look to take profits and sell, new sellers would short the market.

 

Markets move in swings; they often don’t go straight up.

As you can see above, classical technical analysis theory teaches that every uptrend swing must be accompanied with a correction downwards. Even though the price can go in one direction for “far too long”, there will always be a correction.

Riding the bull market 😄

A post shared by Spencer Li 🇸🇬 Synapse Trading (@iamrecneps) on

 

A Correction is Due, BUT…

Before I go on, let me state 2 very basic facts about market euphoria:

Fact 1: Euphoria in the Market Happens Often

In the forex markets, this happens very often. In fact, these are known as gentle trending markets and the easiest way to trade these markets is to buy, add on at every opportunity, and watch your profits grow.

If you zoom in to the 5-minute charts, 1-hour charts, or move to different financial products like Forex, Commodities or Bonds, you would notice that market euphoria is quite a frequent occurrence.

Euphoria in that sense, can happen in both directions, as seen in the diagram below (Hourly chart for EURUSD)

Euphoria can happen in both directions, and for very long. In this case,
there were many opportunities to short, and the trend lasted far longer than one would expect.

Here is another recent example of riding trends:

Trends can last far longer than one expects. That’s why it’s important to know this fact:

Fact 2: Markets Don’t Reverse Immediately!

It’s easy to jump on the hype when almost every news outlet is talking about it. But the truth is this; what’s important is on the chart. Price already gives you the decision-making tools you need!

Even though Goldman Sachs says that a correction is due, that does not mean you immediately go ahead and go all-in to short the market. Even if you are fully convinced that the market is going to crash, it is best to wait for actual price confirmation before taking any action.

Daily chart of the S&P 500, with a small pre-emptive short position which I have initiated.

In trading, it’s all about probabilities. The above technical levels show how far the market might go, but what actually happens will depend on price action. And since the reward to risk is pretty decent based on this price channel, I am winning to take a small short position, and add on more later if it goes in my favour. This will ensure that I have a decent profit from shorting near the top when the market does crash. Till then, fingers crossed!

Here’s some food for thought before we conclude this article:

“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -Sir John Templeton

Cheers and have a great week ahead! 😀

P.S. For those who want to start learning about how to make money from the financial markets, don’t miss our last 2 workshops for this quarter at the special price of $25.
Check workshop availability: http://wp.me/P1riws-6gw

Research Sources:

cnbc.com/2017/02/21/goldman-sachs-market-investors-have-a-letdown-coming.html
thefelderreport.com/2016/05/23/this-might-be-the-most-extreme-stock-market-euphoria-we-have-ever-seen/

All You Need to Know About the Upcoming US Election: Past Trends, Possible Outcomes & Market Impact

us-electionsSource: IBTimes UK

The U.S Presidential election results will be announced On 8 November, where 66.82% of the 218,959,000 have registered to vote. This is much higher than in 2012, where 57.61% of eligible Americans decided to vote. The increased interest in the presidential candidates is unsurprising, but what does it mean for our portfolios? There’s so much buzz around this being a ‘historic’ event that we have to see how the markets are reacting to it.

Before we dive headlong into it, I thought it’ll be good to tickle our brains with a little general knowledge. So instead of simply knowing that Trump has a questionable moral compass or that Hillary has a private email account, let’s fill our minds with some cool stuff.

WHY IS THE ELECTION HELD ON 8TH NOVEMBER THIS YEAR?

possible-dates
Some say that America was an agricultural society and November (the quietest month) was most suited for the rural people. It could have been on Tuesday because people needed time to travel to towns and cities to vote, and some could not have done so in just one or two days. Sounds credible enough to me.

Election Day has always been the Tuesday after the first Monday of November. Based on this rule, it could only fall between November 2 to November 8.

The last time it was held on November 8 was in 1960, and 1988.

1960 Election Results
Candidate Party Electoral Votes Popular Votes
 John F. Kennedy Democratic 303 34,227,096
 Richard M. Nixon Republican 219 34,107,646
 Harry F. Byrd Democratic 15 116,248

1960 saw one of the closest margins in the election, with a mere 120,000 out of 68 million votes swinging the election in Kennedy’s favor. Sadly, he was assassinated in 1963 in the most high-profile murder of the 20th century.

1988 Election Results
Candidate Party Electoral Votes Popular Votes
 George Bush Republican 426 47,946,000
 Michael S. Dukakis Democratic 111 41,016,000

The 1988 elections were more one-sided, with George Bush (Senior) emerging a clear victor.

 

WHAT OUTCOME WILL GENERATE MORE UNCERTAINTY?

With Trump being the tough businessman and Clinton being the seasoned politician, the opinion of voters is very much predictable. You won’t even need to be a news analyst to understand how the general public views them. In the image below, it seems that Hillary has garnered more support in terms of her ability to handle the pressures of the Presidential office.

voteropinionSource: Huffington Post

 

In Europe, it seems that the consensus is that Trump would reap economic havoc, while Hillary would bring great relief. I can just imagine the great fear and trembling that people would feel if Donald Trump were the commander-in-chief, holding the codes for nuclear warheads being released around the world.

yougob

Source: YouGov

POSSIBILITY 1: BULLISH VIEW (MARKETS WILL RISE)

Well, that depends on which markets you are looking at. From a purely fundamental point of view, the market hates uncertainty and it seems logical to believe that markets will rise (by default) if Hillary was president. It agrees with the opinion that Hillary is unlikely to bring a lot of change to the White House, and that things will just continue chugging along.

I stumbled upon an article where an analyst seemingly guarantees that Gold would rise. Although I am bullish on Gold (in the long run) as well, I think that this election is not the key driver.

gold
Source: MarketWatch

As a trader, I always operate in a fog; one moment the market could be bullish, and the next moment the entire sentiment gets reversed. Of course, one can be of the view that Hillary will bring great relief to America and the rest of the world, but what would you do to your portfolio if markets behave otherwise?

 

sp

A cursory glance at the S&P 500 and Gold chart might lead you to conclude otherwise. In the short-term, Gold is not necessarily a safe haven, and it does not have a clear inverse relationship with the S&P 500 in recent years. In both charts above, we see that both seem to be topping out, and the S&P has even broken out of a recent wedge pattern. Gold is struggling to recover from a large breakout from its own wedge pattern as well.

POSSIBILITY 2: BEARISH VIEW (MARKETS WILL CRASH)

Among the many doomsayers out there, I do think there will be a reaction to the market but financial mayhem is quite a stretch. These people’s comments range from something as mild as “a sharp correction”, to “total financial destitution”. At the start of Obama’s term in 2008, he inherited a 34% dip in the Dow Jones Index upon being elected the President.

How much attribution will a “bad” president actually have on financial destruction? The crash of 2008 was the result of systemic banking failure. The crash of the Chinese stock market index in June 2015 was the result of an unprecedented increase in the number of stock pundits (customer brokerage account openings actually double and tripled in the years preceding the crash).

Using statistics of presidential elections since 1945, when the U.S stock market (S&P500) was increasing quickly, the incumbent candidate (Hillary) won 82% of the time; now that’s some pretty decent odds. But when the stock market was falling, the challenger (Trump) won in every election since 1984. While the S&P500 has been steadily rising since 2009, it is starting to look a bit toppish and had a slight correction in the last 1-2 months.

With Europe teetering on the edge of a recession, Trump’s policies could cause Europe to fall into a full-blown economic depression. That’s a real possibility. With his protectionist stance and nationalistic agenda, Trump could very well be the untimely catalyst.

 

POSSIBILITY 3: NEUTRAL VIEW (SIDEWAYS & MORE VOLATILITY)

There seems to be a consensus that volatility in markets will increase leading up to the election (before the mayhem happens, on the actual day, and also in the weeks to come). This makes the Pound interest rate announcement (on Thursday 8pm), and the Non-Farm Payroll announcement (Friday 8:30pm) pale in comparison. My take is that the election has generated far greater anticipation in the financial markets, and these two news events would be a tremor compared to the earthquake that might come.

vix

In the chart above, the VIX has risen steadily for the past week.This is the first time we’ve seen a steady increase in volatility over 7 days; a steady increase like this has not happened for the whole of this year.

POSSIBILITY 4: NEGLIGIBLE MARKET IMPACT (UNLIKELY)

hillarytrumpmemeSource: Kappit.com

With Trump’s tough stance on immigration and trade, his intention to renegotiate the North-American Free Trade Agreement (NAFTA) and scrap the Trans-Pacific Partnership (TPP), the mere mention of such a stance would likely send jitters into emerging markets.

Of course, there are those of the camp that America couldn’t care less about a president, because the world is in a state of low-growth and inflation. Experts have said this is a global Japan-style stagflation and that these conditions mirror those in the 1970s.

HOW DID THE MARKETS FARE IN PREVIOUS ELECTIONS?

A Princeton Research Paper found that GDP growth under a Democrat President (Hillary is a Democrat Candidate) is 1.80% higher, on average, than a Republican President (Trump is a Republican Candidate). This suggests that a Hillary win would be more bullish for markets.

Another famous theory by Yale Hirsch states that U.S. stocks see the smallest gains in the year after an election. The market more often improves after the first year following the election year. Ned Davis Research claims that “since 1900, stocks have gained just 3.4% on average in the post-election year, compared with gains of 4.0% in the midterm year, 11.3% in the pre-election year and 9.5% in an election year.” (This is summarized in the graphic below)

yearsSource: Ned Davis Research

 

With Trump consistently trailing behind Hillary just marginally, markets are going to be in a jittery state in the days to come. The last I checked (on 31 oct), the gap has closed to just 2.1% in the polls:

31octresult

 

STRATEGY & COMMENTS

In the most recent FOMC meeting (3rd November 2am SG time), the interest rate remained unchanged, which was expected since they are unlikely to want to rock the markets further just prior to the elections. The next major piece of news is the NFP on Friday, and for traders who have decided to hold any major medium/long-term positions over the election, this could be a good opportunity to take positions at better prices. This is because the NFP is likely to cause price spikes, but markets are likely to stabilise and flat out rather than trend strongly before the US elections next week.

Based on my personal views (this is not any recommendation to follow), I would prefer to take a bearish position (short) on the S&P 500 going into the election, as I feel that there is more downside potential in general, and the market is more “priced in” for a Hillary win, meaning a Trump win would have more spectacular returns. My plan is to make use of the NFP to enter my positions, for example if the NFP causes an intraday bullish spike in prices, I will use the opportunity to accumulate shorts at more favourable prices. This will enable me to reduce my risk and increase my upside.

Good luck, and may the odds be in your favour! 😀

Join our mailing list to receive 2-3 of our best articles every month (and also get a free ebook):
http://synapsetrading.com/getting-started/ 

Follow us on Social Media to get updates on our latest posts and new trading opportunities:
https://www.facebook.com/synapsetrading/
https://www.instagram.com/iamrecneps
https://twitter.com/synapsetrading

RESEARCH SOURCES & REFERENCES

http://www.270towin.com/1960_Election/
http://www.270towin.com/1988_Election/
https://www.timeanddate.com/holidays/us/election-day
http://www.telegraph.co.uk/news/0/when-is-us-election-2016-what-is-the-timetable-for-the-night-and/
http://www.nbcnews.com/politics/first-read/nbc-wsj-poll-clinton-jumps-nine-point-lead-over-trump-n623131
http://www.cnbc.com/2016/10/31/a-trump-win-could-put-emerging-markets-in-a-tailspin.html
http://abcnews.go.com/Business/story?id=6185252&page=1
http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html
http://www.investopedia.com/terms/p/presidentialelectioncycle.asp
http://www.independent.co.uk/news/world/americas/us-elections/us-election-donald-trump-victory-stock-markets-sp-republican-party-senate-a7392756.html

Shorting the S&P 500 – Potential Trade of the Year?

Recently, after reviewing all the charts, I found a trade with excellent R/R, and potential to become the trade of the year. 😀
2015-08-04 10.11.42 copy

HERE IS THE TRADE POSTED IN OUR DAILY TRADE ALERTS:

daily trade alerts 06056

I am referring to the trade on the S&P 500 short, which we started accumulating positions about 2 weeks ago, and will continue to find pullbacks to continue shorting.

 

HERE IS THE DAILY CHART OF THE S&P 500:

S&P 500 060516
There will definitely be up and downs in this trade, as you can see from the previous instances, that the trade will not simply move one way all the time. Hence, I will be monitoring it on a daily basis to capture its swings, while capitalizing on its downward bias.

If this works, I can take the rest of the year off from trading. 😀 Just kidding haha

For more details & analysis on this trade, do join us next week for my free trading workshop:
http://synapsetrading.com/free-workshop-registration/

Cheers, and see you there!

Trade Review: Closed Short Position on S&P 500 for $2754 Profits

Closed a short trade on the S&P 500 for $2,754 profits over 2 days. Just in time for some Christmas shopping! 😀

S&P 500 211215 synapse network

2015-12-19 01.35.06

The Past 6 Years Summarized in One Chart – Are We Headed for Deflation?

market overview 221115 synapse trading

Since the post-2007 crash recovery starting in 2009, how have the markets fared?

Stocks, represented by the S&P 500, have steadily climbed, gaining an impressive 130% over the 6+ years.

Commodities, represented by oil, silver and gold, did not fare so well.

Oil peaked in the first half of 2011, consolidated for about 3 years, then made new lows in 2014.

Silver and Gold peaked in late 2011, then steadily declined all the way till today, giving up almost all its gains since 2009.

As the Fed gets ready to raise the interest rates, this is likely to give a boost to the US dollar, which will further suppress commodity prices. For oil, this is especially bad, since there is already an oversupply forecasted for 2016.

A higher interest rate will also bring down bond prices, ending the 30-year bull trend, and in months to come, act as a drag on stock prices. This means that the stock market is a ticking time bomb.

If all these happens, we will have a scenario with:

  • Bullish US dollar
  • Bearish oil, gold, silver, commodities
  • Bearish bond prices
  • Bearish stock prices
  • Bearish economy?

That would be a pretty gloomy deflation scenario. 🙁

What is my current portfolio strategy?

Stay tuned for my monthly portfolio update (November 2015) and current portfolio strategy at the end of this month!
Subscribe for our mailing list to receive it in your mailbox! 😀
http://synapsetrading.com/resources/the-7-best-kept-secrets-of-professional-traders/