Trumps Tariffs, Trade Wars, Brexit, Longest Bull Run, are these indicators of a Global Recession?

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In March 24th 2000 the stock market peaked before the the bubble burst, known as the dot.com bubble, in one of the worst market corrections in decades, some companies, such as Pets.com and Webvan, failed completely and shut down. Others, such as Cisco, whose stock declined by 86%, and Qualcomm, lost a large portion of their market capitalization but survived, and some companies, such as eBay and Amazon.com.

The S&P 500 eventually bottomed out at on October 10th 2002 to 769 that was a 51% drop from the high in a matter of two and a half years.

In October 11th 2007 the stock market again peaked and the S&P 500 hit a high of 1576 before the bubble burst again this time know as the financial crisis. The S&P 500 bottomed out on March 3rd 2009 with a low of 666. This time it was a drop of 57% in a matter of one and a half years.

As I describe in my book, history repeats itself and this year is no exception. The markets have already shown increased volatility in the past several of months.

In my analysis the market correct that happens every decade that occurs in years that end in 7 and 8. If we compare the weekly average returns for years that do not end in 7 and 8 you can see (highlighted in green in the tables below) that the volatility is very low and the returns are consistent, however when you compare the same weeks for years that end in 7 and 8 you will see increased volatility and that the returns are more erratic. This occurs before the crash!

Average Weekly returns for years not ending in 7 or 8, week returns are low but are constantly bullish.
Average Weekly returns for years ending in 7 and 8, week returns become more volatile and swing bullish and bearish.

So What Is Next?

Well if we take a closer look at the previous bubbles we can get a better idea of when the market will turn.

So lets take a look at the dotcom bubble in 2000. If you look at the chart below each candle represents one week. It hit a high in March 2000 and then came back down and gained support on the 50 weekly moving average (yellow line). It was pretty volatile but eventually retested the high in August (5 months later) but failed and then broke through the 50 week moving average. The old support becomes new resistance and continues to fall into recession.

S&P500 (SPY) - DotCom Bubble 2000 Market Crash - Click to enlarge
S&P500 (SPY) – DotCom Bubble 2000 Market Crash – Click to enlarge

If we look at the financial crisis of 2008 same this happened. In July it had an all time new high it pulled back got support at the 50 weekly moving average (yellow line) it retested in October but failed, it broke through the 50 week moving average. Old support became new resistance and failed to break through and fell into recession again.

S&P500 (SPY) - Financial Crisis 2008 Market Crash - Click to enlarge
S&P500 (SPY) – Financial Crisis 2008 Market Crash – Click to enlarge

So where are we currently at?

With Trumps Tariffs and Trade Wars the tariffs have started being put in place but it will start taking some months before the U.S. starts seeing that a true impact hitting U.S. business exports and imports and causing a domino effect.

Since the markets have been very bullish these past 10 years it will not take much to start the 10 year correction pattern (as mentioned in my book).

If you look at the chart below we are eventually coming back up to the high set back in January of this year and the very fact that it has taken this long is a red flag in itself. This is a crucial moment and one of the first indicators that a recession is coming if the S&P 500 fails to breakthrough the high set in January.

Another thing to consider is pattern 1 the seasonal trend pattern (as stated in my book) which shows to stay out of the market between months August through to October, because typically these months perform poorly, which means more than likely if it does retest in this period it’s more likely to fail then to push through.

The next coming months are going to be interesting to see.

S&P 500 Futures (SPY) 8/23/2018 (Click to Enlarge
S&P 500 Futures (SPY) 8/23/2018 (Click to Enlarge

 


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