Even though the Dow Jones Industrial Average circuit breaker was triggered, there are opportunities for long-term investment profits based on past price movement patterns. 3/10 Mr. Tetsu Emori
Tetsu Emori's Real Trading Strategy March 10, 2020 08:01
Broadcaster: ECM
Republished with a one-minute excerpt
〔EQUITY & BOND MARKET〕
【Market commentary and analysis of U.S. and European stocks & bonds】
U.S. stocks plunged due to the global spread of the coronavirus and the sharp drop in crude oil prices. The Dow Jones Industrial Average closed at 23,851.02, down 2,013.76 from the previous Friday. The magnitude of the decline at the close was the largest on record, and it was the lowest since mid-January last year, about 1 year and 2 months ago. Intraday it fell over 2,100 at one point. Just after the opening, the S&P 500's decline exceeded 7%, triggering the circuit breaker for the first time since the current rules were adopted in 2013, pausing trading for 15 minutes.
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【US stock trading strategy】
U.S. stocks posted the largest drawdown on record. Comparisons to Lehman are common but the background is different. Therefore, from a fundamentals perspective it cannot be discussed on the same table. However, the market does move in patterns similar to past moves. It will not move identically, but it does move in similar ways. Therefore,Understanding past price-movement patterns remains important. There is panic selling now, but prices will eventually rebound. For now, stay calm and spend time understanding past patterns.
Past patterns have been introduced in many cases. According to them, the S&P 500 is expected to rise roughly 8%–16% in a year. However, the S&P 500 has fallen 19% from intraday highs. It is near bear-market territory. Even if it retraces 16% from here, based on past data averages, it will not reach the previous highs within the year. There are patterns that retrace more than 30%, so a full recovery is not guaranteed, but on average that would be the conclusion. With the U.S. presidential election ahead, we should watch whether the Trump administration will promptly roll out stock-price measures.
On the other hand, regarding the price movement until the weekend when the S&P 500 fell more than 5% in a day, since 1952 there have been 10 instances including this one where Monday fell by more than 5%. Looking at past patterns, the next day rose in all cases. Therefore, today is a “buy.” The average subsequent rise is 4.20%. By the following week, on average 5.07%, with an 7.8% probability of a rise being high. By the following month, 3.17% on average, with an 77.8% probability of a rise. After 3 months, 4.98% rise with 77.8% probability. After 6 months, 12.75% rise with 88.9% probability of rise.
However, after the recent rebound it becomes harder to rally, but after six months it would rise by 12.75%.
In this case, only the drop on September 28, 2008 during the Lehman shock declined 27.89% six months later. However, even in this case, it rebounded 5.42% the next day. Looking at past data, today should rise at least. Therefore, a strategy of focusing on short-term trading and buying only today is possible. Please view this as one reference.
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The VIX spiked, rising to 62.12 at one point. Needless to say, the market is in a panic. If you panic and sell along with it, you will miss opportunities for long-term investment returns. As explained many times, timing investments using the VIX: when the VIX is above 35, investing in the S&P 500 yields returns of 25% after one year, 41% after two years, and 45% after three years. The higher the VIX, the greater the subsequent returns on the S&P 500.
【Japanese equities & bonds market: overview & analysis】
The Nikkei Stock Average closed down 1,050.99 points at 19,698.76, and the TOPIX fell 82.49 points to 1,388.97, with broad-based declines across all sectors. The coronavirus infection continued, and investor sentiment worsened further; selling accelerated across all sectors. 99% of issues declined, only 1% rose. Trading volume was 2,518,470,000 shares, and turnover was 3.4646 trillion yen. All 33 sector indices declined. Only four Nikkei 225 components rose, making it a truly broad decline.
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BOJ Governor Haruhiko Kuroda told the House of Councillors Budget Committee on the 9th that, amid the spread of the coronavirus and the resulting continued turbulence in financial markets, uncertainty about the economy's outlook has heightened, investor sentiment has deteriorated, and global stock prices have fallen, long-term yields have fallen, and the yen has appreciated amid unstable currency movements. He said the central bank would make maximum efforts to stabilize the markets. Regarding the emergency rate cut by the Fed, he said it was 'based on the increased uncertainty about the global economy and U.S. domestic economic and price trends,' and noted that the Bank of Japan is 'striving to ensure ample liquidity and market stability through appropriate market operations and asset purchases.' He added, 'In particular, we will monitor domestic and international financial market developments closely and take appropriate action as needed.'
【Japanese stock trading strategy】
Nikkei futures are trading below 19,000 in overseas markets due to the declines in U.S. stocks and the stronger yen. It looks set to open sharply lower today as well, but as discussed in the US stock section, historical data show that today tends to fully reverse losses. If Japanese stocks hold the line here, it could mark a bottom for now. The decline is extremely steep, and many investors are in an unprecedentedly difficult situation, but this looks to be a critical moment.
During such a large downturn, North Korea somehow launches missiles. It seems to be a move to push the market lower. Some form of linkage seems to be in play. The possibility of behind-the-scenes cooperation between Japan, the U.S., and North Korea has been pointed out before. Be careful of a sharp rebound following a deliberate price drop.
Rapid yen appreciation and stock declines have deepened concerns about the domestic economy. Abenomics, which had continued to expand the economy on the back of a weaker yen and higher stock prices, is clearly at a turning point. It is extremely unclear whether expansionary fiscal measures can revive the economy. The government seems to prioritize passing the FY2020 budget, while there are signs of demand from the ruling party for a supplementary budget after that. Within the Liberal Democratic Party, there are voices saying 'If this continues, Japan’s economy will sink,' calling for a roughly 20 trillion yen large-scale supplementary budget.
Within the Ministry of Finance, there seems to be a view that 'discussing a supplementary budget is unavoidable,' and moves to prepare such a budget appear to be underway behind the scenes.
〔CURRENCY MARKET〕
USD/JPY dropped sharply. Under the backdrop of the global spread of the coronavirus and lower crude oil prices, the yen, as a safe haven, was bought, dropping to the low 102s. It briefly strengthened toward around 101.18. The coronavirus spread worldwide, with infections in over 100 countries/regions. In the U.S., infections exceeded 500, and New York State declared a state of emergency. WHO Director-General Tedros Adhanom Ghebreyesus on the 9th said that the threat of the novel coronavirus developing into a pandemic 'has become quite real.' With the global stock-price decline continuing, investor sentiment worsened further, and demand for the safe-haven yen rose. Furthermore, OPEC+'s talks collapsed last week among member and non-member oil producers; Saudi Arabia indicated it would sharply increase production, pushing oil prices to end the week more than 24% lower than the prior week. This fueled yen buying. However, given the rapid yen appreciation, position adjustments involving yen selling have also occurred, bringing the rate back to the 102 area. In addition, as a risk-off move, safe-haven Swiss francs have surged. The dollar, meanwhile, has gained against emerging market currencies. This is a classic risk-off pattern. However, the dollar index has fallen to its lowest level since September 2018.
【Currency trading strategy】
