First I want to start off with the 10 year and 2 year yield inversions. In the previous recent recessions, we see that we usually stay within the inversion for a bit while forming the top before the crash and recession. The covid crash didn’t happen that way because it was such an unique situation. If you also look at the previous 2 times in 2000’s and 2008, you see that the inversion happened briefly before and then came back into inversion. Similar to right now where we had a brief inversion and most likely to form another inversion and stay there to form the top.
I want to also look at this chart I found. Usually for recessions, we see a peak at margin debt and then a lower peak form before we truly crash. We formed the peak on margin debt. Now most likely, we will form a lower peak before a recession/ crash just like the 3 times before.
Now looking at P/E ratios, we are still in a strong economy. We are weakening, but that doesn’t mean that we’re weak. In the previous recession, the PE ratio was basically near zero or below. Looking at the ratio as well, we made a new ATH even with a weakening economy. I think a similar case will play out, maybe some catalysts being corporate buybacks that are being mentioned.
Now looking at federal funds, we don’t crash when it starts to go up. We crash after it peaks. We’re just at the start of it and that’s when we see these huge panic selling moves. I don’t think that we’ll crash here and this is just a bigger panic selling move because this is such a propped up market due to all the printed cash.
Now looking at the technicals, ever since the 2008 rally, we have found bottoms at the 50 line of the RSI monthly, which is where we are right now. Looking at the 2008 crash, we broke through the 50 easily. The selling momentum here is not the same and I don’t think we’re going to get the same waterfall selling into a crash.
Looking at the weekly, we are already at the extremes as the 2018 correction and 2020 crash. We are very oversold and near regions to expect huge rallies. I don’t think that there are enough selling pressure to cause more downside into a crash.
Looking at the 2000 and 2008 crashes, we are already at the MACD and RSI extremes at those levels. If we were going to crash, we wouldn’t be at these oversold levels right now. We would be near the middle of the MACD and RSI. These overextensions are signaling a bottom and a rally soon.
Looking at other charts such as the 10 year, we might be seeing peak inflation readings, which can cause the markets to get optimistic and rally. Looking at the fed, they’re not getting more hawkish, standing on the 50 bps rate hikes. If they remain not hawkish, markets won’t sell off into a recession, whether that’s good for the economy or not. But these are unprecedented times and a situation we’ve basically never been in before. If we do crash and go into a recession right now, I guess we’re just setting a new precedent.
I’m in the camp that thinks we’re in the final bull run portion. The final stage is a big correction followed by a stupid impulsive rally. I think these moves are just magnified right now because the market is propped up by fake money. I expect a top sometime this year or early next year and then a crash sometime 2023. I’m expecting SPY to reach at least 500 before we crash.
This DD was pretty dogshit and I’m not really proud of it because I’m not in the mood right now. But hopefully it gets most of my reasons across.