SPX: What Is A Recession?
This is going to be a very extensive post so it will take some time to fully grasp most of these concepts but I am going to try my best to explain my perspective of the current economic landscape and what implications certain factors can have going forward.
First, let us look at the Original Chart in the post and explain it:
As you can see I have laid out the Resistance and 3 different layers of support. One local support at ($3850) and Two long Term Supports at ($3400) & ($2850) respectively.
Current Criteria:
IF the price pushes past the current Resistance labeled in the chart, I expect more upside over the next few weeks to months as the market expands and ignores recession fears for now. Remember, in this scenario, markets can remain irrational FAR longer than you can remain solvent.
IF the price rejects off of this Resistance, it highly suggests Local support will be tested and if that is lost then the two long-term supports will come into play. I have labeled why the price would make it there and where the sentiment would likely be in this scenario.
Now let's try to understand the current Recession Delima and where we stand:
Today we live in a world where the past isn't considered a measure. To be a historian today would mean you would be doubted by most, saying "This time is different", "Past performance is not indicative of future performance", "Dinosaurs didn't exist", Etc etc.
Our perception of the world and the lives we live are constantly changing. This new digital Era has connected the world in ways never seen before in humanity. So inherently, the way we think, what we believe, and how we anticipate the future has changed and is ever-changing.
So much so, that even the most basic understanding of an economy comes into question. Over the last week, we have seen the "Definition" of a Recession be explained in vastly different ways. To such an extent Wikipedia actually blocked any edits in relation to the actual definition. The White House has downplayed Recession fears repeatedly and we have heard Powell mention a "Strong economy" just about every time he has spoken.
Let us ask ourselves this first; what were these same people saying before the snowball actually started to roll down the hill? "Inflation is transitory", "No Recession Risks".
Today we find this guidance to be incredibly misleading and incorrect. "But no one could have predicted this".... Wrong.
Many people saw the red flags and predicted the tailwind effects of these dynamics. Even if the ones in power ultimately know, they can never let us in on the "know".
If you've ever run a company or led any kind of extensive group, there are information highways. Certain information goes to certain groups, while others are left in the dark. Think of us, the regular working-class individuals, as the group that's left in the dark.
Governments are run on the base concept of the people do not know what's best for them so we created a system that we believe will lead to better decisions for the betterment of society.
A real downside to this reality is that there will always be a communication deficiency between the Government and the People.
This is where the strange Re-Definition of a Recession comes into play.
A commonly accepted definition of a Recession is simply, Two or more Quarters of Negative GDP Prints. We have seen just that. Although this isn’t the end all be all definition, it is one check mark down.
"Real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a decrease of 1.6 percent in the first quarter. The smaller decrease in the second quarter primarily reflected an upturn in exports and a smaller decrease in federal government spending".
bea.gov/data/gdp/gross-domestic-product
But US President Biden rejected the idea that the U.S. is in a recession, and instead touted continued job growth, low unemployment, and growing investment from manufacturers.
Sure these are valid reasons, but WHY is that the case? Is it from pure organic growth or is it coming after the complete shut down of an entire country for 2 years?
To put the job growth into perspective, we aren't even back to 2020 Employment levels before Covid hit:
tradingeconomics.com/united-states/employment-rate
So to play their game, What exactly is the definitely of Job Growth or Strong Employment?
You see, words and data can be very misleading. This is why, "Don't trust, but verify" is crucial to surviving in this world. If you're waiting on someone to give you a warning or for someone to give you the official green light on something, you'll hear about it after it's already too late.
It is very likely if there is a true Recession coming, most officials won't claim it so until we are already about 25% into it. We may very well look back on today a year or two from now and think, "It was so obvious".
Now that we have covered the psychological aspect of the situation, let us look at it objectively and with some charts.
Here I will first show a comparison between 2000 and 2008:
This shows the Price Action of both 2000 and 2008 leading up to the ultimate wipe-out of the economy. I have labeled the percentage (%) of Drawdowns relative to both the peak and the rejection off resistance. These percentages can prove important because it reflects a potentially pivotal point in which the market finds a new Fair Value.
Now, if we look at our current position, you can see just how similar the Price Structure is. Price has seen a significant breakdown and then followed up with a retest of this support that has now turned resistance. I have labeled the same percentages as 2000 & 2008 just so the comparison can be made and why these levels are truly significant:
We are currently seeing the retest of the lost support, which occurred both in 2000 and 2008 very similarly. Although it is not guaranteed to repeat, it is something significant to note nonetheless.
Next lets look at the US10Y-US01Y which has been a signal for the last 6 Recessions, which occurs after there has been a significant Yield Inversion: (I have outlined each time we have seen the beginning of the inversion so what happens after can be perceived)
If you look at the chart, you can see there has been a significant inversion after inverting for a very short time back in March. We haven’t seen an inversion of this caliber since 2000 and 2008.
To further support this development, if you just look at the US10Y, you can see it has once again parabolically rallied from its sharpest drop to its strongest impulse up to reach the historical trend line:
I have labeled what has occurred following this development, as well as showing SPX in relation. Pay attention to each RSI level as well.
Okay? So What? You can also say there have been gains after an inversion occurred… Sure this is true, but ask yourself this, are you prepared, and do you have a well enough plan laid out to properly secure those profits when the time comes?
You have to remember, timing is absolutely everything so while an Index may have a 10% rise overall if you didn’t buy the absolute bottom, that 10% would actually be more like 5% or 6% for you.
Furthermore, unless you sell with the right timing, those profits are not secured. Let's lay out some quick math because this concept seems to be missed by quite a few.
Let us say an index goes from 1,000 to 6,000 and generated a 500% return on your money. Great. So now why worry about just a correction when you are up 500% already?
Well, here's a reason… A 50% correction from this level does NOT leave you with a 450% gain. Instead, a 50% correction subtracts 3,000 points, reducing that 500% gain to just 200%.
Then the problem becomes of regaining those lost 3,000 points to recover lost profits or to cut and make sure that the last 200% profit is secured.
Long story short, profits are not profits until you sell. End of story. These decisions could mean early retirement or no retirement.
I know this is a really extended post but let's touch on just a few more things I deem very important.
Let's take a look at the Dow Jones (DJI) and see where it stands:
Here you will see a very similar approach in a few other charts below where I have labeled the Deviations from the original trend which marks a “Blow off the Top” type of event. Whenever the value is extended beyond usual terms, is when the chances of a significant reversal increase. It marked warnings for both 2000 and 2008.
Next, let's look at an aspect of the Housing Market which would be the Average Sales Price of Homes sold in the US:
As you can see I have once again labeled a possible Deviation. This along with the massive RSI Divergence building over a 40-year period, the “Safe Heaven” of the housing market may not be as bulletproof as most would believe.
Furthermore, let's analyze the 30-Year Fixed Rate Mortgage Average in the US:
We have seen the sharpest impulse in Fixed Mortgages since 1980 and a possible break of a 40-year downtrend. What exactly would that mean for new homeowners over the next 20 years?
Moving on, let's look at the VIX and what it can mean for the market:
A general rule of thumb is if using the VIX as a reference, you want to look for positions when VIX is at significant resistance (Or after a parabolic rise) and you want to exit positions/use caution when VIX is at support. This is very prevalent in thinking Medium/Long term. As you can see the VIX has been steadily trending upwards since February of 2018 and I have labeled other points in time for reference.
Here’s a small reference to DXY which has had a historical rally in a time that no one really expected:
As you can see there has been a breakout of very important resistance, and if DXY holds strength and investors continue to value the dollar in ways not consistent in the past, liquidity will remain dry in relation.
Now, let's talk about USOIL which holds a significant % in CPI changes. If Oil/Energy continues to climb here over the next few months then so will CPI. If Oil falls below its deviation zone, then CPI will likely subside for some time before any significant changes.
Here is a reference to see this deviation level with respect to the SPX:
I have marked every time USOIL lost this level to see possible effects.
This does not mean the "Inflation Peak" narrative is one of any substance. Inflation peaking will not inherently change anything as it will take most likely Years to get Inflation down to FED target of 2%. So the actual strain of inflation on most of society will remain even despite an inflation peak.
In fact, If CPI prints at 0% every single month between now and December, we will still finish 2022 with 6.3% YoY inflation.
Also, in 2000 and 2008, it wasn't until after USOIL lost its deviation zone is when the worst was seen in the economy.
Remember again, all those that said Inflation is "Transitory", "Controlled", and "Peaking" were all dead wrong. Remember that despite the consensus and despite leadership, the SPX Year-To-Date Performance (In Real Terms) is the WORST since 1872. That may sound extreme but check for yourself (Source: BofA Global Investment Strategy, Bloomberg).
Please keep in mind even if Markets continue to rally, DONT forget where we are and where we were. As everyone has said this would be the most anticipated Recession of all time, it will likely be when everyone either forgets about it or expects the worst is over, which is when the Recession actually hits.
Stay Focused.
To further understand more about the current Economy I will refer you to my last extensive post on the SPX which I will link here below:
This post expands on things I do not touch on here and will give greater insight overall. Most information is complementary to each other from post to post, so the more you understand about one, the more you will understand about the other.
If you've made it this far into the post I would like to Thank You immensely for taking the time to read the analysis. My goal is to expand thought and perspectives to hopefully give a greater understanding of the current situation.
Please let me know if there are any questions, as I would be more than happy to answer or converse on the subject.
Again, Thank you!
First, let us look at the Original Chart in the post and explain it:
As you can see I have laid out the Resistance and 3 different layers of support. One local support at ($3850) and Two long Term Supports at ($3400) & ($2850) respectively.
Current Criteria:
IF the price pushes past the current Resistance labeled in the chart, I expect more upside over the next few weeks to months as the market expands and ignores recession fears for now. Remember, in this scenario, markets can remain irrational FAR longer than you can remain solvent.
IF the price rejects off of this Resistance, it highly suggests Local support will be tested and if that is lost then the two long-term supports will come into play. I have labeled why the price would make it there and where the sentiment would likely be in this scenario.
Now let's try to understand the current Recession Delima and where we stand:
Today we live in a world where the past isn't considered a measure. To be a historian today would mean you would be doubted by most, saying "This time is different", "Past performance is not indicative of future performance", "Dinosaurs didn't exist", Etc etc.
Our perception of the world and the lives we live are constantly changing. This new digital Era has connected the world in ways never seen before in humanity. So inherently, the way we think, what we believe, and how we anticipate the future has changed and is ever-changing.
So much so, that even the most basic understanding of an economy comes into question. Over the last week, we have seen the "Definition" of a Recession be explained in vastly different ways. To such an extent Wikipedia actually blocked any edits in relation to the actual definition. The White House has downplayed Recession fears repeatedly and we have heard Powell mention a "Strong economy" just about every time he has spoken.
Let us ask ourselves this first; what were these same people saying before the snowball actually started to roll down the hill? "Inflation is transitory", "No Recession Risks".
Today we find this guidance to be incredibly misleading and incorrect. "But no one could have predicted this".... Wrong.
Many people saw the red flags and predicted the tailwind effects of these dynamics. Even if the ones in power ultimately know, they can never let us in on the "know".
If you've ever run a company or led any kind of extensive group, there are information highways. Certain information goes to certain groups, while others are left in the dark. Think of us, the regular working-class individuals, as the group that's left in the dark.
Governments are run on the base concept of the people do not know what's best for them so we created a system that we believe will lead to better decisions for the betterment of society.
A real downside to this reality is that there will always be a communication deficiency between the Government and the People.
This is where the strange Re-Definition of a Recession comes into play.
A commonly accepted definition of a Recession is simply, Two or more Quarters of Negative GDP Prints. We have seen just that. Although this isn’t the end all be all definition, it is one check mark down.
"Real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a decrease of 1.6 percent in the first quarter. The smaller decrease in the second quarter primarily reflected an upturn in exports and a smaller decrease in federal government spending".
bea.gov/data/gdp/gross-domestic-product
But US President Biden rejected the idea that the U.S. is in a recession, and instead touted continued job growth, low unemployment, and growing investment from manufacturers.
Sure these are valid reasons, but WHY is that the case? Is it from pure organic growth or is it coming after the complete shut down of an entire country for 2 years?
To put the job growth into perspective, we aren't even back to 2020 Employment levels before Covid hit:
tradingeconomics.com/united-states/employment-rate
So to play their game, What exactly is the definitely of Job Growth or Strong Employment?
You see, words and data can be very misleading. This is why, "Don't trust, but verify" is crucial to surviving in this world. If you're waiting on someone to give you a warning or for someone to give you the official green light on something, you'll hear about it after it's already too late.
It is very likely if there is a true Recession coming, most officials won't claim it so until we are already about 25% into it. We may very well look back on today a year or two from now and think, "It was so obvious".
Now that we have covered the psychological aspect of the situation, let us look at it objectively and with some charts.
Here I will first show a comparison between 2000 and 2008:
This shows the Price Action of both 2000 and 2008 leading up to the ultimate wipe-out of the economy. I have labeled the percentage (%) of Drawdowns relative to both the peak and the rejection off resistance. These percentages can prove important because it reflects a potentially pivotal point in which the market finds a new Fair Value.
Now, if we look at our current position, you can see just how similar the Price Structure is. Price has seen a significant breakdown and then followed up with a retest of this support that has now turned resistance. I have labeled the same percentages as 2000 & 2008 just so the comparison can be made and why these levels are truly significant:
We are currently seeing the retest of the lost support, which occurred both in 2000 and 2008 very similarly. Although it is not guaranteed to repeat, it is something significant to note nonetheless.
Next lets look at the US10Y-US01Y which has been a signal for the last 6 Recessions, which occurs after there has been a significant Yield Inversion: (I have outlined each time we have seen the beginning of the inversion so what happens after can be perceived)
If you look at the chart, you can see there has been a significant inversion after inverting for a very short time back in March. We haven’t seen an inversion of this caliber since 2000 and 2008.
To further support this development, if you just look at the US10Y, you can see it has once again parabolically rallied from its sharpest drop to its strongest impulse up to reach the historical trend line:
I have labeled what has occurred following this development, as well as showing SPX in relation. Pay attention to each RSI level as well.
Okay? So What? You can also say there have been gains after an inversion occurred… Sure this is true, but ask yourself this, are you prepared, and do you have a well enough plan laid out to properly secure those profits when the time comes?
You have to remember, timing is absolutely everything so while an Index may have a 10% rise overall if you didn’t buy the absolute bottom, that 10% would actually be more like 5% or 6% for you.
Furthermore, unless you sell with the right timing, those profits are not secured. Let's lay out some quick math because this concept seems to be missed by quite a few.
Let us say an index goes from 1,000 to 6,000 and generated a 500% return on your money. Great. So now why worry about just a correction when you are up 500% already?
Well, here's a reason… A 50% correction from this level does NOT leave you with a 450% gain. Instead, a 50% correction subtracts 3,000 points, reducing that 500% gain to just 200%.
Then the problem becomes of regaining those lost 3,000 points to recover lost profits or to cut and make sure that the last 200% profit is secured.
Long story short, profits are not profits until you sell. End of story. These decisions could mean early retirement or no retirement.
I know this is a really extended post but let's touch on just a few more things I deem very important.
Let's take a look at the Dow Jones (DJI) and see where it stands:
Here you will see a very similar approach in a few other charts below where I have labeled the Deviations from the original trend which marks a “Blow off the Top” type of event. Whenever the value is extended beyond usual terms, is when the chances of a significant reversal increase. It marked warnings for both 2000 and 2008.
Next, let's look at an aspect of the Housing Market which would be the Average Sales Price of Homes sold in the US:
As you can see I have once again labeled a possible Deviation. This along with the massive RSI Divergence building over a 40-year period, the “Safe Heaven” of the housing market may not be as bulletproof as most would believe.
Furthermore, let's analyze the 30-Year Fixed Rate Mortgage Average in the US:
We have seen the sharpest impulse in Fixed Mortgages since 1980 and a possible break of a 40-year downtrend. What exactly would that mean for new homeowners over the next 20 years?
Moving on, let's look at the VIX and what it can mean for the market:
A general rule of thumb is if using the VIX as a reference, you want to look for positions when VIX is at significant resistance (Or after a parabolic rise) and you want to exit positions/use caution when VIX is at support. This is very prevalent in thinking Medium/Long term. As you can see the VIX has been steadily trending upwards since February of 2018 and I have labeled other points in time for reference.
Here’s a small reference to DXY which has had a historical rally in a time that no one really expected:
As you can see there has been a breakout of very important resistance, and if DXY holds strength and investors continue to value the dollar in ways not consistent in the past, liquidity will remain dry in relation.
Now, let's talk about USOIL which holds a significant % in CPI changes. If Oil/Energy continues to climb here over the next few months then so will CPI. If Oil falls below its deviation zone, then CPI will likely subside for some time before any significant changes.
Here is a reference to see this deviation level with respect to the SPX:
I have marked every time USOIL lost this level to see possible effects.
This does not mean the "Inflation Peak" narrative is one of any substance. Inflation peaking will not inherently change anything as it will take most likely Years to get Inflation down to FED target of 2%. So the actual strain of inflation on most of society will remain even despite an inflation peak.
In fact, If CPI prints at 0% every single month between now and December, we will still finish 2022 with 6.3% YoY inflation.
Also, in 2000 and 2008, it wasn't until after USOIL lost its deviation zone is when the worst was seen in the economy.
Remember again, all those that said Inflation is "Transitory", "Controlled", and "Peaking" were all dead wrong. Remember that despite the consensus and despite leadership, the SPX Year-To-Date Performance (In Real Terms) is the WORST since 1872. That may sound extreme but check for yourself (Source: BofA Global Investment Strategy, Bloomberg).
Please keep in mind even if Markets continue to rally, DONT forget where we are and where we were. As everyone has said this would be the most anticipated Recession of all time, it will likely be when everyone either forgets about it or expects the worst is over, which is when the Recession actually hits.
Stay Focused.
To further understand more about the current Economy I will refer you to my last extensive post on the SPX which I will link here below:
This post expands on things I do not touch on here and will give greater insight overall. Most information is complementary to each other from post to post, so the more you understand about one, the more you will understand about the other.
If you've made it this far into the post I would like to Thank You immensely for taking the time to read the analysis. My goal is to expand thought and perspectives to hopefully give a greater understanding of the current situation.
Please let me know if there are any questions, as I would be more than happy to answer or converse on the subject.
Again, Thank you!
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