Just another piece of the economic/stock market puzzle but should help explain some of the reasons why the stock market has been going down.
As we know the stock market is based on forward earnings (P/E) not what is currently being earned.
There has been recent reports, sighting an increase in wages.
There have also been many reports of companies lower sales forecasts (demand).
These 2 factors squeeze profit margins to the downside.
Every time a profit margin is squeezed, the 'forward P/E' needs to be downgraded.
When the forward P/E is downgraded then the stocks price will also likely be downgraded/decline.
When this happens enough we start to see the indexes go down as well, (like what is currently happening..)
The drawing below should help explain the above, with the forward P/E (share price) shrinking every time either of these 2 factors are applied.
This why those P/E ratios might look attract now based on the current/past earnings but may not be so attractive if sales forecasts are continually downgraded....
Now we could wait for the company to tell us this after the fact....
Or...
We could use the economy (economic indicators) to gauge this before the company reports profits/earnings..
As we can see in this example and others I have recently posted, we would know that demand (spending) is down YoY and MoM across almost all economic indicators/sectors.
We also know that these changes in supply/demand feed upon themselves, more demand creates more demand (spending), less demand creates less demand (less spending).
Why I believe the December rate hike won't give markets a big rally. (My opinion)
If 'demand' (spending) isn't there and is already declining then it doesn't really matter in the big scheme of things about the next rate hike.
The markets have already 'front-run' us and have told us demand isn't there, the Fed lowering or halting interest rates isn't going materially change this fact.
I see 3 possible scenarios playing out,
1. - A rate hike in December will be seen as bearish by markets.
2. - Talk of further rate hikes will be seen as very bearish for markets.
3. - No rate hike will likely be a very short-lived bounce followed by a further sell down as demand is still decreasing relative to interest rates going up or down..
Now, this information is nice to know but holds no value for us traders unless we can profit from it.
Based on the economic indicators, information above andddd commodities prices going down it would be fair to say that growth and inflation are also going down.
Q. What usually happens when growth and inflation are going down?
A. Interest rates are lowered to stimulate spending (growth) and also to devalue the currency (increase inflation, increase asset/commodity prices)
A. What 2 sectors benefit greatly when interest rates go down?
Q. Long term US Treasury Bonds & Gold.
The price of long term US Treasury Bonds go up as interest rates go down, they will also go up in times of crisis as they are seen as the safest (risk free) of safe havens.
Gold is also seen as a very safe haven in times of crisis.
If we believe interest rates are going to go down and that it will devalue the currency then the price of Gold will benefit from this devaluing (and other in-demand commodities)
Gold has also started rising on its own accord, not just to inverse of the dollar, this is a sign of strength in the metal.
(The RBA has already announced it intends to cut interest rates next year....)
10 yr US Treasury Bonds - Daily chart
- Currently setting up into a 'Bull Flag' pattern looking to either break out on the Fed's decision this week or have a short-term pull back before completing the pattern.
- Much more room to move from expected interest rate cuts.
Gold Futures - Daily Chart
- A series of higher highs and higher lows
Plenty of great Gold producers out there, DCN and RSG are my main picks.
Hopefully others can benefit from this information as that's its intended use.
If this theory/system is true then hopefully it can also help others identify new sectors to invest/trade in too...
(20min delay)
