Stock Market Prediction

[ReplayRandall]

Markets
August 5, 9:16 PM UTC

DOW
25,717.74
▼ 767.27 (2.90%

NASDAQ
7,726.04
▼ 278.03 (3.47%)

S&P 500
2,844.74
▼ 87.31 (2.98%)

Couldn't be more pleased...

[ReplayRandall]

Asian Markets getting hammered again....

World Markets »
Level
% Change

Nikkei 225 Japan
20,393.42
-1.58%

Hang Seng Hong Kong
25,770.02
-1.46%

Data as of 11:52 pm EST

US Futures look flat, nothing to see.....

U.S. Stock Futures
S&P
-3.00 / -0.11%

Data as of 11:52pm ET
Nasdaq
-0.50 / -0.01%

Data as of 11:52pm ET
Dow
-37.00 / -0.14%

[highnote]

Anybody have a prediction on which stocks or other asset classes will be most likely to go up in this current market environment?

According to Ray Dalio there are four factors that move the price of assets:

1. Economic Growth/Contraction
2. Inflation/Deflation

You could say there are actually two factors because each pair in the list above are really the same things on a continuous line. Contraction is negative Growth. Deflation is negative Inflation.

He calls these the 4 seasons.

That 2 pairs of factors above create a 4 square matrix.

Growth can either increase or decrease. Inflation can either increase or decrease.

.............|..GROWTH........|..INFLATION

RISING.......|..Higher than...|..Higher than
.............|..expected......|..expected
.............|..economic......|..inflation
.............|..growth........|..
---------------------------------------------
FALLING......|..Lower than....|..Lower than
.............|..expected......|..expected
.............|..economic......|..inflation
.............|..growth........|..

Here is the asset allocation Dalio recommends in each of the "seasons".

.................GROWTH..................INFLATION

RISING...........Stocks..................Commodities/Gold
.................Corporate...............Inflation Linked 
.................Bonds...................Bonds (TIPS)
.................Commodities/Gold

FALLING..........Treasury Bonds..........Treasury Bonds
.................Inflation Linked........Stocks
.................Bonds (TIPS)

Here recommends 7.5% Gold. 7.5% Commodities. 30% stocks because they are 3 times as volatile as bonds. 40% long term bonds. 15% intermediate term bonds.

He recommends periodically rebalancing -- say, once per year.

The challenge is knowing what environment or "season" we're in. Currently, economic growth has seemed good, but yet, the market took a big hit today. The market is forward looking. Does that mean investors see contracted growth on the horizon due to the Trump tariffs and currency manipulation by the Chinese?

The Fed just cut interest rates and there is very strong likelihood of more in September. Does that mean the Fed is worried about deflation? Or is the Fed just trying to give the economy a soft landing and try to keep inflation at the current level of about 2%?

I wrote about my attempt to understand the current market using the Zweig Model at this link, but it is still not clear to me what might happen next:
https://monsanna.blogspot.com/2019/0...odern-era.html

So does anybody have a prediction on which stocks or assets classes will be most likely to go up?

[barn32]

Originally Posted by Saratoga_Mike

For Sept, there's a 42% chance of a 50 bps cut and a 58% chance of 25 bps (so 100% chance of a cut).

You wanna run this by me one more time please?

[Saratoga_Mike]

Originally Posted by barn32

You wanna run this by me one more time please?

I'm not sure what isn't clear (?) - you can certainly disagree with the 100%, but that's what's implied in the mkt (Source: Bloomberg).

[barn32]

Saratoga_Mike
For Sept, there's a 42% chance of a 50 bps cut and a 58% chance of 25 bps (so 100% chance of a cut).

If there was a 100% chance of a 25bps cut, and a 50% chance of a 50bps cut, does that mean there is a 150% chance of a cut?

It seens to me there is a 58% chance of a cut, and 24% of the time that there is a cut it will be 50bps instead of 25.

[Saratoga_Mike]

Originally Posted by barn32

If there was a 100% chance of a 25bps cut, and a 50% chance of a 50bps cut, does that mean there is a 150% chance of a cut?

It seens to me there is a 58% chance of a cut, and 24% of the time that there is a cut it will be 50bps instead of 25.

The 100% in my post = the 58% + 42%. It was not referencing the 25 bps cut (poor placement of the parenthesis on my part). And to be even more precise, Bloomberg % applies to what range Fed Funds will be in at any point in time, then you can obviously back into rate cut/hike scenarios.

[highnote]

Here is a summary of the blog piece I wrote yesterday about whether to buy, sell, or stand pat after the big selloff on Monday, August 5, 2019:

https://monsanna.blogspot.com/2019/0...odern-era.html

(Spoiler: I decided to stand pat. SP up 21 today, but it's still early.)

...Zweig's model is giving a slight buy signal. The interest rate cut was a bullish signal for buying stocks. Conversely, there are signs that a recession may be coming. Given the mixed signals, I am holding for the moment, but am prepared to buy or sell depending on what happens next.

Trump's tariffs and China's currency manipulations are causing a lot of uncertainty and was a big driver of the selling Monday, August 5, 2019. If Trump can force China to the negotiating table and resolve the tariffs and currency issues then the indicators most likely would be giving buy signals.

Given what happened to Carter, George Bush I and II at the end of their terms, if Trump wants to be re-elected he would be wise to remember James Carville's slogan that helped Clinton defeat Bush, "The economy, stupid."

Carter's economy with high interest rates, inflation, and a recession along with other crises, led to Reagan.

Bush II's faltering economy in the summer of 2007 led to Obama's election.

For these reasons, I look for Trump to resolve the issues in time for the election -- but that is still over a year away. A lot of bad stuff can happen in a year. If people get hurt badly economically that could be reflected in their votes in November 2020.

[barn32]

Originally Posted by Saratoga_Mike

The 100% in my post = the 58% + 42%.

Yes, I know. And...I give up.

[Saratoga_Mike]

Originally Posted by barn32

Yes, I know. And...I give up.

There's a 50% chance of one rate range and 50% of another rate range (rough numbers). The end. Source: Bloomberg

[barn32]

Originally Posted by Saratoga_Mike

There's a 50% chance of one rate range and 50% of another rate range (rough numbers). The end. Source: Bloomberg

Correct. But there is not a 100% of a rate change. You can't simply add the probabilities. They are mutually exclusive events. They can't both happen.

If you flip a coin, can it come up both heads and tails?

[highnote]

Originally Posted by barn32

Correct. But there is not a 100% of a rate change. You can't simply add the probabilities. They are mutually exclusive events. They can't both happen.

If you flip a coin, can it come up both heads and tails?

Saratoga Mike wrote: "For Sept, there's a 42% chance of a 50 bps cut and a 58% chance of 25 bps (so 100% chance of a cut)."

I interpreted this to mean that there is a 100% chance of a cut where,

42% chance of a cut of 50 bps;
58% chance of a cut of 25 bps;
XX% chance of a cut of something other than 25 or 50 bps;
and
100% chance of a cut of more than 0 bps.

[barn32]

OK, now I get it what's being said here. If fed funds rates are suggesting there is a 100% chance of a rate cut, then the percentages are just divided between 50bps and 25bps.

It's not a 100% chance of a rate cut because one has a 58% chance and the other 42%.

It's based on the assumption that there will be a rate cut 100% of the time.

My apologies for the misinterpretation.

[ReplayRandall]

When you start reading comments like these, they're just prepping the public for what's about to ensue....A massive downturn of epic proportions, worse than everyone thinks, as we've never seen neg rates here in the US.

"Negative yields could be coming to the U.S. Treasury market during the next downturn. Or so says PIMCO’s Joachim Fels.
In a post on PIMCO’s blog published Wednesday, Fels, the firm’s global economic advisor, writes that, “It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative.”

https://finance.yahoo.com/news/pimco...155641167.html

[PaceAdvantage]

Yawn...what's it up today? 500 points on the Dow or something like that?