Why The Stock Market Will Fall : wallstreetbets

Why The Stock Market Will Fall : wallstreetbets

Why The Stock Market Will Fall

History:

“History repeats itself”, we have all heard the saying and oftentimes this has been proven to be true, ironically. Human nature is quite predictable, basing off Maslow’s hierarchy of needs, and this nature can be translated to market trends as well. As Warren Buffet has said, “If you stay in the market long enough you will see everything”. This is mainly because the market follows similar trends over the course of 56 months to complete one cycle.

Now you may be wondering what is part of this cycle because if you knew it, of course, you could become a millionaire. Well, sorry to burst your bubble, but that isn’t true. Although there is a cycle it can’t be perfectly timed due to other factors from politics, epidemics (had to add that recently), and even personal fears.

Nevertheless, I will quickly go through a crash course of the cycle. The complete market cycle goes through periods of bull runs and bear runs with depression being accounted for every 70 or so years (Ray Dalio). The average bull market from 1937 to 2013 is about 39 months. The average bear market is about 17 months, the same as the most recent one. So that comes out to be a total of around 56 months for one cycle.

“The 5 years from 2005 to 2010 is one of the greatest examples of history. During those years, stocks were rising sharply through 2007 and then reversed down over -50% and then moved back up nearly 70%. It was the highest volatility ever recorded since the Great Depression. That is true both in terms of the swings and the average daily range in prices. From April 2005 through April 2010 the S&P 500 stock index ended with a slight loss across the full market cycle. Many alternative investment strategies or alternative trading strategies have an absolute return objective to create profits across a complete market cycle rather than track a benchmark.”

Now what we can get from that is the idea that a market cycle has been proven in the past, even though bear and bull loyalists have always hoped the next cycle doesn’t contain the other side. But there is a bigger concept that is at play here and that is the idea that if a bull and bear trend can come to rough estimates then we can figure out the relative bottom for this cycle based on previous years. So looking back at the last two cycles we get these two crises:

https://preview.redd.it/0c20wft8d4u41.png?width=689&format=png&auto=webp&s=d7afb4beb2364bd9c6c558986f4ef8785d764e79

Now aside from the fact that both these declines were a headache for anyone who was trying to time the bottom, we can see a few trends.

First I would like to point out the relatively long “double top” and “inverted cup with handle” bearish patterns. The market has declined with signs of it regaining traction from Feb-08 to June-08 and March-00 to Sep-00, only to prove the bull wrong in the end by pulling the rug from underneath them. Now this is not to say that the classic saying of “stocks only go up” is wrong, at least that is the case in long term investments as the market rises with the global knowledge model since knowledge is a constantly growing factor with little to no fluctuations. But at least in the short term (5 years), there are occurrences of a drop, which for casual traders is difficult to deal with.

Secondly, this graph is our initial proof of the cyclical pattern with the Tech Bubble 2000-2002 recession lasting 19 months and the Financial crisis 2007-2009 lasting 17 months. But the two bear markets are not enough proof to validate a report that collides with huge funds like the very trustworthy Goldman Sachs (LMAO). So let us go back in history to the past few bear markets and I’ll give a quick overview of all of them.

https://preview.redd.it/hvi8dn28d4u41.jpg?width=960&format=pjpg&auto=webp&s=786b67c871ace081f2e1ebffa13204121514b452

When looking at the previous graph it becomes quite clear that when the sun shines on the bear it shines bright. The bull markets in no sense are something to mock and for any long term investor who doesn’t care for the 5-year cycle but only looks to have a satisfactory return by their retirement. However, for any options trader or individual seeking to be actively involved in the market be it to make quick money for college, a new house, a new car or a wedding, this is a keen insight. As is visible, no bear market in the past has lasted only 1 to 2 months, as some believe this bear market will. Similarly, the drops have been significant but not rapid as they keep fluctuating and come to bottom around -34.33% from ATH.

Now the S&P 500, as great as it is, isn’t the only indicator of where a market stands. VIX also plays an active role in determining bottoms or at least drops. For this, I will refer to the discussion board post as I believe u/BlueTreeCloud said it best:

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“Bear market rallies and VIX capitulation: One consistent theme in equity market crashes is that the VIX tends to capitulate before the equity market troughs. The peak in the VIX is typically followed by a bear market rally, and the market then makes new lows. For example, in 2008 the VIX peaked in October, followed by a 24% bear market rally into December. Subsequently, the SPX troughed four months after the VIX peaked – in March 2009.

The current bear market rally is larger, but not that dissimilar in magnitude to those seen in 2001 and 2008. If the market follows the same path today as in 2008-09, then that could see the SPX reach a low near the end of July, at a level of 1900, down 30% from the current spot. Estimating the lows: Instead of using just 2008, we take the average ratio from every crash, between the SPX level at the VIX peak and the eventual lows. That suggests an anticipated trough of around 2140. Alternatively, 1935, if we use the average of just recessionary instances.

Timing of the low: Recessionary bear markets are typically very long. The duration between VIX peak and SPX trough also tends to be longer in deeper recessions. On average, spot lows come 140 days after the VIX peak during recessions, vs just 42 days in all crashes. Applying those averages to the VIX peak on 16 March would imply market lows between mid-April and early August. The risk to this view is that it will take longer for the economy to recover. If the crash morphs into a more typical recessionary one in terms of length, then we may not see the lows until late next year”

https://preview.redd.it/hlpbr457d4u41.png?width=743&format=png&auto=webp&s=01508b31dba48ca62105917a328a51b7483ce9fa

With the recent increase in VIX as we saw with the March drop, we can see that another drop is coming soon. The VIX comparative model can be seen in the 1929 crash as well with stocks hitting record highs and then crashing. This can also be seen through the rapid increase in short contracts being bought indicating that the MMs have decided to hurt the common investor once again for more gain.

History and trends are a strong method of predicting the market as people in general fall for the same mistakes just with different words. That’s one of the big reasons the financial loan bubble is reforming, according to Michael Burry. However, for our current situation to look at history and previous trends at least in my opinion is a strong model and proves many rights if analyzed correctly.

Analytics:

Now I am no mathematician nor genius, if I was I would be making this report not for the public but rather for the Market Makers. Nonetheless, analytics when it comes to the stock market is quite fun and so I decided to spend a few months learning them extensively and started using them, leading to my investment strategy becoming much more comprehensive. This was around 2 years ago and so since then I have had some practice with working with the numbers but I also rely on other members of society and so this part will be directed mainly from u/aibnsamin1 and u/Variation-Separate along with a few relatively trustworthy articles.

Three major methods of using analytics are time analysis, similar to historic trends, technical analysis, and price analysis. We will touch base on all three fronts for this report.

When scanning discussion boards I noticed that u/aibnsamin1 articulated upon the concept of technical analysis exceptionally well: Technical indicators are often considered self-fulfilling prophecies due to mass-market psychology gravitating towards certain common numbers yielded from them. This means traders must be especially aware of these numbers as they can prognosticate market movements. Often, they are meaningless in the larger picture of things. Volume, another aspect of technical analysis, derived from the market itself, is mostly irrelevant. The major problem with volume is that the US market open causes tremendous volume surges eradicating any intrinsic volume analysis. At major highs and lows, the market is typically anemic. Most traders are not active in terminal discrete because of levels of fear. It allows us confidence in time and price symmetry market inflection points if we observe low volume at a foretold range of values. We can rationalize that an absolute discrete is usually only discovered and anticipated by very few traders. As the general market realizes it, a herd mentality will push the market in the direction favorable to defending it. Volume is also useful for swing trading, as chances for swing’s validity increases if an increase in volume is seen on and after the swing’s activation.

https://preview.redd.it/f6ms5sx4d4u41.png?width=1108&format=png&auto=webp&s=6f0fc7658f6e8120cbc963d1421d12a52c86f840

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Looking at the bar chart of the S&P 500 we can also see the levels to watch carefully, as we are at the time of writing this part right up against 2885 similar to the March 10th high, just before the market turned lower again. For the market to go any higher the S&P 500 must cross 3000 as it is a huge psychological barrier for some, especially after the recent downturn. The most recent low was on April 9th coming in at 2700. So from the 2200 low we saw recently to the 2900 high we have seen a bounce that many were not expecting.

However, with all these odd technical indicators there is an even more surprising factor, the RSI. No don’t worry it’s not the IRS trying to collect your money, RSI simply is an indicator that tells an investor if a stock is oversold or overbought compared to other prices and volumes in a time frame. RSI when looking at the S&P 500 is surprisingly not very oversold at the moment with it touching the oversold marker around March 23rd and rapidly going higher to mid to upper levels. Rapid growth in RSI may seem like a strong bull market but it is a classic sign of unsustainable growth that usually comes from uneducated investors or because of complacency.

With RSI currently at 73.6, we see a high indicator of us running up to a recent overbought level. RSI, once breaking its 70-80 barrier, in most cases drops back to its mid-level, which either leads to slow growth or stagnation, however, in market conditions like such it would likely lead to a greater downturn as more people begin to sell off out of fear. Banks could also capitalize on recent highs by beginning a sell-off as they need capital to offset their losses from the recent crash in oil prices, in which many of them held contracts on large investments. In fact, a Singaporian oil firm recently lost $800 million in oil futures alone.

Time analysis to a large extent has already been discussed through the historic section, so this will be short and to the point. Weekly Lows for the last five weeks have been as follows: Mon, Mon, Wed, Wed, Tue with monthly Lows for the last year being on 3/23, 2/28, 1/27, 12/3, 11/1, 10/2, 9/3, 8/5, 7/1, 6/3, 5/31, 4/1. Possible Monthly Lows: 4/27 (Monday). We see that SPY tends to have its lows between three major month clusters: March, July, and November. By looking at the weighted time analysis for daily we can see that the 3rd and 10th days of the months are crucial as they are usually the lowest.

“The 8.6-Year Armstrong-Princeton Global Economic Confidence model – states that 2.15-year intervals occur between corrections, relevant highs, and lows. 2.15 years from the all-time peak discrete is April 14th of 2022. However, we can time-shift to other peaks and troughs to determine a date for this year. If we consider 1/28/2018 as a localized high and apply this model, we get 3/23/20 as a low – strikingly accurate. I have chosen the next localized high, 9/21/2018 to apply the model to. We have achieved a date of 11/14/2020. The average bear market is eighteen months long, giving us a date of August 19th, 2021 for the end of the bear market – roughly speaking.” (u/aibnsamin1)

TA alone doesn’t run the world, and let’s hope it doesn’t because it would lend sole dominancy to computers and algorithms than when it comes to trading. However, to ignore an aspect of trading that is so crucially weighted into large hedge fund decisions would be foolish. The TA provided shows signs of reversals or of a dead cat bounce, but much like any statistic, there is always a chance of the null hypothesis being proven right. As long as the data stays on the indicated charts we could be seeing downturns begin in May or even as late as August. But one aspect of the market is clear: the recent rise in stocks seems to be a facade.

Logic:

Common sense and logic in many cases beat all other factors. Some of my most successful have been based solely on logic and not at all by looking at numbers. The reason being, most people think the same way, so if one person has a brilliant idea most of the time many others do and hence the market begins to move with the person. Usually, the most obvious plays or reasonings work out due to this sole reason. So, looking through the lens of logic, let’s decipher why this market is bound to fall.

Is there a vaccine yet? I’ll help you out, no there isn’t. The coronavirus can in no sense be stopped quickly from killing people unless there is some treatment or vaccine. The treatments that are being hyped may not work as effectively as hoped. “The Gilead action was clearly a fake pump and Remdesivir has been known for a couple of months as a potential treatment, but not a cure-all.”(u/TheInvestmentAdvisor). Hydroxychloroquine may help but the studies behind it are very mixed and most of the supply is held by India, who are already having their own major crisis with the recent religious war which is using COVID as it’s weapon of choice.

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Of course, COVID 19 alone did not cause the fall that we witnessed, the lockdowns played a huge role too. Aside from the panic they caused, they disrupted many industries and supply chains as well. Lockdowns are the sole reason retail employees are being furloughed at such a rapid pace. These are the reasons we are witnessing 22 million unemployed American citizens, more than we have seen since the Great Depression. The scariest part about the lockdown, however, is the fact that Trump has just handed over responsibility to state governments instead of keeping control. The feds know that if they continue to raise the quarantine every month then they will risk being shown as uninformed and so they have placed the responsibility on the governors. Now, this may help Trump win the election potentially due to the fact that any lockdown procedures that go bad, won’t be blamed on him. As far as how the states are handling the lockdown, most are doing fine except for Florida, which opened up beaches, because of course, the sun cures Corona and Texas who is hosting rallies to close the lockdown. With lockdowns most likely to be extended next month, J. B. Pritzker just shut down schools for the rest of the year, we can continue to see higher unemployment numbers, and for states that do open lockdowns, we can expect to see more cases.

A lot of people started their businesses at the top of the market because when everyone is making money people start thinking they are geniuses and should start their own business. Seriously there is a business that started recently to make customized “tera rocks”, do you know what tera rocks mean? It literally means earth rocks with colors being dyed in. So for companies like such, they already don’t have too much money, and by now being sent back home, thankfully, they aren’t paying for office rent. On a serious note though, the number of businesses and people not paying their rent is extremely high.

“AirBnB’s and generally rented properties are also in a bad place. No one is traveling nor renting them now and some of the owners are over-leveraged and will now be forced to sell or rent. If they rent it out, they are probably no longer cash flowing after debt servicing. Also, most major cities rely on property prices increasing to justify investment as most condo units don’t cashflow with a mortgage.” (u/TheInvestmentAdvisor)

The Real Estate Market is huge, as visible from all the YouTubers talking about how flipping houses with initial debt is the key to life, and the debt that backs it up is equally massive. After all, The Big Short even pointed out how debt in real estate is awfully managed. So what happens when renters can’t pay their building owners? Hint: the real estate market is beginning to fail too.

The overall logic shows signs of no approval. The good news is that propping up this dead cat bounce seems to be dying off and larger than life investors are keeping their money safe. With Warren Buffett and Seth Klarman both keeping their cash to themselves, the general public gets subtle advice not to buy in either. Buffet already spoke off how he bought in too early in previous markets and will most likely be waiting longer this time, after all, as he is a master of patience.

With the market showing signs of an upcoming reversal, many will be either happy that their contracts or inverse ETFs are finally printing, and many bulls will fight hoof and horn until the market moves up in a year or so. The current situation hasn’t occurred in a long duration of time and so there are always ways that the bear market will not return and within a month the S&P 500 will be the highest ever, however, by looking at the math and history it seems that the market is suggesting that it is about to fall.

A special thanks to u/fuzzyblankeet for giving really informative posts to WSB

Also, for any of you wondering what my positions are here they are:

Bought these around 2 weeks ago

CRWD $80 Call 4/24

SNAP $13 Call 4/24

XOM $33 Put 4/24

BAC $20 Put 4/24

AMD $62 Call 4/24

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