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Macro-economics negative spiral leading indicator

Overview

This post documents how we identify negative macro downtown.

Heurisitics

  • When more than 20 companies within the mega cap area experience large dip within a week, it is a good indication that macro economics trend has shift
  • Verify by cross referencing with SQP, QQQ and ^RUT
  • During this scenario, it might make sense to shift position into SRTY

Related references

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June 4th 2019 US/China trade war loss aversion reversion to mean pattern

Overview

The central banks announced they stepped in to prop up the market if situation deteriorates with the ongoing trade war.

The world’s leading indicator

The Russell index observed to have started stabilization as recent as the 31st of May 2019

The trend followers

Down trend persisted for the Nasdaq well till 4th June 2019

Down trend persisted for the S&P 500 well till 4th June 2019

The leading indicator for Asia

The Nikkei Index closely mirrored the Russell 2000 index

Other Asian indexes

The charts for the Asian markets closely mirror the SnP charts with Singapore being most responsive amongst

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Learnings on shorting the market during the May 2019 US/China Trade war

Overview

  • As with micro-trend, first determine if the root cause of the negative macro trend is structural as opposed to transient
  • When trading on macro trends it is definitely more efficient to utilize industry wide indexes as opposed to individual stocks positions. This is due to the noise within the channel when dealing from micro events.
  • Next step is to consider the exit strategy for an index position

Shorting outcome for 2019 US/China trade war

Below are a list of transactions on the short side of the market with the attempt to ride this negative macro trend.

Positions were picked based on occurrences of large dip scenarios in the prior few weeks.

This strategy under performed when compared against simply shorting the SnP index during the same period.

Related references

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Prediction on US/China Trade war to be verified in 2021

Main points of contention

  • Marxist ideological foundation versus a Judeo-Christian philosophical foundation
    • “In god we trust” versus a centrally controlled and designed market model
    • China’s inability to open up markets internationally due to challenges in finding a sustainable way to separate market from government
    • viewing the Party as above the market leading to difference in way IP ownership is viewed
  • The Chinese dream versus the American dream
    • China’s dumping strategy which lead to the severe imbalance of trade and thus steady US job losses over the past years
    • China’s strategy of acquiring US technology via forceful knowledge transfer due to its point of view on markets which resulted in the blacklisting of Huawei
    • China’s intention to establish leadership over two thirds of the world’s population thus challenging US dominance leading to the election of a hawkish US president

Assessment of situation

  • The issue is deeply structural and resolution will be unlikely during Trump’s current term of service
  • Companies within impacted industries will continue experiencing negative headwinds well beyond 2019
  • US companies will gradually shift production to the US and other parts of the world as President Reagan’s hypothesis on China’s successful transition to a market economy gets invalidated
  • World splits into two distinct economic blocs
  • Chinese economy will face continued pressure given the following concerns
    • aging population
    • lack of room for further domestic growth
    • none granting of WTO market status
  • US untangles its free market economy from the Chinese centrally controlled market economy as the latter slips into recession

Related references

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3rd June post effects of 13th May 2019 US/China Trade war on US markets

The following is a list of 19 companies either in the tech sector or with market capitalization above USD20 billion that experienced more than 10% drop in share price on the May, 13th 2019.   Below is the breakdown in terms of price performance on 15th May 2019.
  • 2 companies (10.5% of sample) not related to trade war
  • 2 companies (10.5% of sample) fully recovered
  • 7 companies (36.8% of sample) at least 50% recovery
  • 10 companies (52.63%) not recovered by at least 50%
Below is the breakdown in terms of price performance on 3rd June May 2019.
  • 2 companies (10.5% of sample) not related to trade war
  • 2 companies (10.5% of sample) fully recovered
  • 15 companies (52.63%) not recovered by at least 50%

Related references

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Macro economic analysis on US/China 2018/2019 Trade war

The 196 pages of Chinese goods to be taxed by the US governments are spread across 6 categories. Where US manufacturers cannot find alternative sources of supplies, price increase of end product will be expected. Based on what was observed in December. The ability of the US government to sustain the trade war is predicated upon the Feds keeping interest rate low.

Taxed categories include

  • agricultural produce
  • textiles
  • chemical compounds
  • hardware parts
  • mechanical parts
  • electronic parts
The December 2018 US market financial meltdown can be attributed to US government tariffs to reduce demand for foreign material supplies from China coupled with Feds interest rate hike to limit capital needed to boost domestic production. The trade war seems to serve three purposes:
  • Drive up demand for domestic supplies
  • To keep inflation in check the economy grows (traditionally a role played by Fed Interest Rates)
  • Keep China in check.

Related references

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Donald Trump’s 3rd May 2019 trade war tweets on stock market index around the world

Tweet was posted in May 5th 2019 where Chinese import tax hike to 25% from 10% was proposed. Immediate negative effects were most prominent on Hong Kong and Straits Times stock index. An observed 4.5% drop. Immediate effects were negligible on the Shanghai index as bad news seems like it was already factored a few days prior to the tweet. An observed 6% drop prior to the tweet. Effects on the SnP was negligible. An observed 0.45% drop. The London Stock exchange (FTSE) seems to be humming to its own rhythm.