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SPX vs. Money Supply A fellow trader on Tradingview turned me on to the idea of tracking the US money supply and its effect on the S&P 500 and let me tell you, was this an all consuming rabbit hole or what! In this post, I will look at the relationship between the US money supply and the S&P. Well, that was what it was supposed to be. It then turned into a look at how global money supplies affect indices in general because it is a really interesting rabbit hole indeed. So let’s get into it. Does Money Supply Affect the Stock Market? The general consensus that I could find in economic research and reports is that, in general, the US money supply and, more generally, global money supplies influence stock markets indirectly. The most obvious way is, money supply is needed to fund global investments in markets. Without money, there would be no way to invest. But there are also some indirect ways that money supply (MS) can influence the stock market. The most notable way is by creating liquidity and influencing behaviour. This is probably the most fresh example as it was arguably one of the biggest fuels on the post-COVID recovery bull run we had. The Federal reserve enacted monetary policy that made borrowing attractive and promoted investment, borrowing and leveraging (which took advantage of very low interest rates). If we take a look at the chart above, this chart depicts the US money supply against $SPX. The data is standardized in Z-Score format to be able to do side by side, direct comparisons. We can see that immediately following the COVID crash, the US money supply began rapidly increasing. This was the result of federal reserve policy aimed at quantitative easing. This was arguably one of the leading causes to the unprecedented growth of the S&P in such a short timeframe. How has the US Money Supply Affected the S&P 500? If we zoom out on the above chart and look at the US money Supply since 1959 overlayed against the S&P, we can see, visually, how the US money supply has impacted the S&P 500: The first thing of note is there is a high degree of correlation between SPX and the US Money Supply, which has a Pearson correlation of 0.98. This is a strong, positive correlation . This means that as the US Money Supply increases, so too should the S&P and vice versa. We can also see that, for the most part, the S&P’s growth is comparable to the US money supply. As the Money Supply increases, the S&P grows to match this supply. The exception to this was a stint of time between 19843 and 2002 where the S&P outpaced the US Money Supply: The dotcom crash ultimately led to the S&P correcting back below the US Money supply, where it then recovered to catch back up to the US money supply, and the money supply actually became resistance in 2007. We then again outpaced the money supply in 2018. This likely could have been a cause to the 2018 correction, which actually brought the S&P back down in line with the current supply at that time: We then outpaced the money supply again in 2021, which was corrected during the 2022 bear market. However, we have ,yet again, in 2023, surpassed the current monetary supply: Calculating Money Supply & SPX Price The relationship between the monetary supply and the S&P is so strong, we can actually calculate the expected range of the SPX based on the current monetary supply. We can also reverse this and calculate what the monetary supply should be to support the current price of $SPX. To calculate the expected range of SPX based on the money supply, we would use this formula: SPX price = US Money Supply x 1.918^-10 – 114.426 This would calculate what the price of SPX should be within +/- 228 points. To calculate the needed money supply to support the price of SPX we would use this formula: Money supply needed = SPX price x 4970424901 + 8.204^11 This would calculate the money supply needed to match the SPX. So let’s do these calculations. As of August, the current US Money Supply is 20.903 Trillion. So we substitute: SPX Price = 20.903 Trillion * 1.918^-10 – 114.426 SPX Price = 3895.01 +/- 228 So the range that SPX should be in based on the money supply is between 4,123 and 3,667. What about our monetary supply? What should that be to support the current price of SPX? Well, let’s do the calculations. As of Friday August 25th, SPX closed at 4,405. Monetary supply needed = 4,405 x 4970424901 + 8.204^11 Monetary supply needed = 23.63 Trillion So the SPX should be at ~23.63 Trillion in order to support the current price of SPX. That is roughly a 13% increase from where we currently are. How does an Index surpass Monetary Supply? This is a great a question and one that I am not qualified or knowledgeable to answer very in-depth. But one way in which the SPX can sustain itself at levels above the current domestic monetary supply is through foreign investment. Indices and stocks are traded internationally and are not dependent on their own domestic currency alone. Where this gets interesting is if we start looking at global monetary supply. Now, there are no tickers or indices that look specifically at global monetary supply, but what we can do is take the monetary supply of a few nations that have a high degree of international trade and compare the monetary supply among those countries. You will notice the strong degree of correlation between all the nations in this table. (Keep in mind, these nations were randomly picked based on extent of their involvement with international and U.S. based trade.) If we were to standardize the data into Z-Score format (where we are just looking at the standard deviation) and put it into a line graph, this is the result: When we standardize data, the difference is very indiscernible. This is because, monetary supply naturally increases at a steady and controlled rate, as to keep inflation under control and create supply and demand. How does the SPX’s Growth Compare to Global Monetary Supply? In researching for this post, I was curious how SPX’s growth looked in relation to the global monetary supply. The reason being, the thesis is that SPX’s growth above monetary supply can only be supported by the global interconnectedness of nations and the ability of foreign investment to supplement domestic investment. To do this, I standardized SPX in the same way and overlayed it with the random sample of countries monetary supply. The results are displayed in Chart 1 below. I found this particularly interesting. I wondered if perhaps this was an American thing where everyone is just simply flocking to US investments. So then I thought to plot out some other indices, namely the TSX (Canada), NIFTY (India), DAX (Germany), and FTSE (U.K.). The results are listed in Chart 2 below. Well, colour me shook. For the longest time it was actually the DAX and TSX that were just growing beyond the average monetary supply. Who would’ve thought? However, in 2019, SPX began exponentially growing, where it currently sits at approximately 0.7 standard deviations above the average monetary supply. So what does it all mean? So the logical question is what does it all mean and how does it help me? And unfortunately, this is a question more for an economist than for me. But I and you yourself can speculate by looking at all the data. If we turn back to our SPX chart overlayed with the US monetary supply and apply Tradingview’s Cycle lines, we can see that the SPX operates in cycles in relation to the monetary supply: And using the Sine function: Essentially, these things are cyclical. We can see the same type of cyclical behaviour when we compare the individual indices to the SPX directly: All this means is that we should eventually correct back down to the monetary supply, during which time another index will outperform the SPX and take the lead. Then rinse and repeat. My personal take away from this little research project is twofold. First, diversification in foreign markets is a smart idea and provides somewhat of a hedge against putting all your eggs in one market and one economy. Second, you should pay attention to where and when you are investing in relation to the current monetary supply. If we look at the chart above, the most stable and healthy gains were achieved when SPX was below the monetary supply. Whenever it was trading above, it would frequently experience drops of, on average, 2 standard deviations back down to the monetary supply in a matter of months until eventually correcting with a bear run and then resuming a healthy bull run. That doesn’t mean you need to wait for a crash or calamity before investing, but its good to pay attention to the extent that a stock may exceed the current money supply. If we look for example at NVDA: This is not a place I would buy NVDA because this move is likely not sustainable. But if we look, for example, at a stock like Ford ( NYSE:F ): You will see that it is in a much more enticing area for a potential long entry. Final Thoughts: Hopefully you found this interesting, I sure did! I want to just say, that I am not saying SPX is going to crash or that we will experience another bear market any time soon. The reality of the situation is SPX has a track record of spending years trading above current monetary supply before correcting. Therefore, its not really realistic to expect SPX to suddenly come crashing down in a matter of weeks and correct back to the levels that the current MS supports. During the 1980s and 90s, it took over 15 years to correct! As well, only looking at the MS is probably going to be insufficient if its all you are looking at in planning your trades. Its just one of many things to consider when you are researching your investments for your portfolio with the ultimate decision coming from weighing out all factors holistically. But it is definitely something to be mindful of! And that concludes the lengthy post. Thank you for reading! Leave your comments and questions below!
Editors' picks
SP:SPX
by Steversteves
49
BTCUSD: Market influence.Greetings to all traders! I have some valuable trading-related information that I would like to share with you. Please give it a read and if you find it helpful, kindly leave a positive feedback and consider following me ❤️ When there is no activity in the gold market, it is getting squeezed. It is expected that the funds will be directed towards bitcoin and then return on Monday. Note: Note: Full TP, SL for winning the market and safe trading!
Long
by Sphyn-Trader
2
XAUUSD: Buyer's long-term strategy!Greetings to all traders! I have some valuable trading-related information that I would like to share with you. Please give it a read and if you find it helpful, kindly leave a positive feedback and consider following me ❤️ The world's reserve currency has been misused by American politicians, bureaucrats, and central bankers who have failed to manage their finances responsibly. Instead, they have recklessly increased their debt to other countries, which has led to a growing concern among international central banks. They fear that the debt will not be repaid in a fair currency but instead in rapidly declining Federal Reserve notes. This realization has prompted an unprecedented increase in sovereign gold purchases by foreign central banks, who are aware of the risks involved. It is crucial that individual investors also recognize the situation before it is too late to protect themselves from a potential currency crisis. Note: Full TP, SL for winning the market and safe trading!
OANDA:XAUUSDLong
by Sphyn-Trader
15
XAUUSD: Seller's Opportunity!Greetings to all traders! I have some valuable trading-related information that I would like to share with you. Please give it a read and if you find it helpful, kindly leave a positive feedback and consider following me ❤️ The technical indicators are signaling a potential increase in risk and a decline in earnings, which may worry those who are bullish on the stock market in 2023. As a result, the price of gold may be negatively affected. Additionally, it is important to consider the negative impact that silver's recent outperformance may have. Historically, silver tends to outperform gold before major market downturns occur. With silver having corrected 50% of its 2022 decline, this is a significant sell signal. Overall, there are several indicators that suggest that gold prices may decrease in the future. While seasonal factors may currently be boosting sentiment, it is important to maintain a realistic long-term outlook. SELL XAUUSD zone 1998 - 2000 Stoploss: 2007 Take profit1: 1990 Take profit2: 1980 Take profit3: 1965 BUY XAUUSD zone 1983 - 1985 (scalping) Stoploss: 1980 Take profit1: 1990 Take profit2: 2000 Note: Note: Full TP, SL for winning the market and safe trading!
OANDA:XAUUSDShort
by Sphyn-Trader
9
Emotions in Trading VS Emotion in Life Emotions in Trading VS Emotion in Life It needs to be understood that emotions are a part of life and can’t not be ignored or locked away. The important thing is how we deal with them. Do you let your emotions control you or do you take control of them? We first need to understand why we have emotions: Emotions help us to take action, to survive, strike and avoid danger. To make decisions and to understand others. They can help a decision-maker determine which aspects of a decision are the most relevant to their specific situation. Emotions are like a double-edged sword: They help you see problems in a new light or they create problems that aren’t even relevant. Emotion reduces anxiety or increases anxiety. Eases depression or creates depression. Let’s move onto emotions when it comes to trading: Emotions are great when you are with friends, writing or watching a movie but when it comes to trading, they are pure kryptonite. If you feel like you need to rationalize or defend the trade you have just made, then this a clear sign of emotion. Be surgical with your trades! Do not let one bad trade ruin your day, this is counterproductive. Stay focused and reject the emotions and self-loathing. Move on! We should be following structure as long as it is profitable, all the while looking for signs of rotation. You can never go broke by taking profit. Be mindful of your mood and confidence level. How actively and carefully you define your risk will have major implications on the long-term health of your wallet. Your goals should be humble, and your approach to reaching them methodical. Money is made waiting. If you spend your time obsessing over old losses you have a high probability of generating new ones. After a big loss – Thinking you have to make the money in the next trades is a bad idea as you do not have a good feel for the trade and so you are likely to repeat the same mistakes that cost you money in the first place. Always stay patient, stick to the System and don’t let yourself get caught up in the emotions of trading. Be patient, be careful and choose your trades wisely. You should be a cold calculated sniper, focused on the mission at hand. Monitor your emotion and aim to be neither too high or too low – stay grounded and focused. If you are not willing to lose it. Don’t put it on the exchange. Learn to accept and embrace the risk. Traders should put on a trade without the slightest bit of hesitation or conflict, and just as freely without hesitation or conflict, admit when you were wrong. If you are unable to trade without the slightest bit of emotion or discomfort (specifically, fear and greed) then you have not learned how to accept the risks inherent in trading. This is a big problem, because to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. Redefine your trading activities in a way that allows you to completely accept the risks is the key to thinking like a successful trader. Learning to accept the risk is a trading skill. It is one of the most important ones you can learn. Disciplined Traders: Developing Winning Attitudes. Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful. It’s when you’re winning that you are most susceptible to making a mistake, overtrading, putting on too large a position, violating your rules, or generally operating as if no prudent boundaries on your behavior are necessary. You create your own outcomes, the market doesn't care or feel anything towards you. The way you think (is extremely important) Think it - Believe it - Achieve it The best traders stay in the flow because they don’t try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment. Accepting the risk means accepting the consequences of your trades without emotional discomfort or fear. Each trade is a new trade. No, matter if you won or lost your last trade, it doesn't impact your current trade. If you are fearful, you can't learn something new and it will make you forget the bigger picture. No one knows what is going to happen next, so stick to the strategy. What you think does not matter - What you see can be changed - What you feel is emotion which is not needed when trading. Every trade is different, there is no such thing as certainty in life let alone trading. To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. Learn to trade with NO expectations. Create a carefree state of mind that completely accepts the fact that there are always unknown forces operating in the market. “Losses are simply the cost of doing business or the amount of money I need to spend to make myself available for the winning trades.” When you really believe that trading is simply a probability game, concepts like right and wrong or win and lose no longer have the same significance. A Trade in three phases: Entry: The first phase commences when direction has been confirmed and requirements to enter have been established. You begin getting excited, your heart pumps a little faster, you sit up in your chair. As your entry point gets closer, you start to lean toward the screens. As the entry gets closer and closer, you start to feel nervous. You begin to think you are missing out, and that you should have already entered the trade (This is FOMO). Then it begins to pull back, which by the way you wanted to happen, but you begin to start questioning whether the entry point is still valid. You ask yourself, is this just a pullback or is it reversing? All of a sudden it does a quick spike up ... Followed by a quick dump. Now your heart is really pounding and your finger on the mouse is shaking. It looks like the right time to enter; all the right confirmations are present, but you just do not feel it is right and you are seeing all these other signals telling you that it is the wrong setup! At that very moment you need to decide if you are going to listen to your emotions or follow the process and systems you have be taught. You cannot do both. DECIDE! During the Trade: You finally make the decision and pull the trigger to enter, but that does not calm your emotions. In fact, the emotions keep coming, and keep coming even more powerfully. You hear yourself say, “Yes! Yes! It’s going in my direction. My entry was perfect.” But then, “Oh no! It’s starting to go against me. My feelings were right. I shouldn’t be in this trade but wait, it’s now coming back in my direction!” “Yes! Keep going!” “Wait! Oh no! It’s going against me again.” You start to frantically search for signals to help you decide whether or not to stay in, or exit the trade. Your heart is still pounding. Your mind is saying that since you have some profit, you should take it and run. “Don’t give it back! Exit! Exit! EXIT!” You give in, you exit. After the Trade: At this very moment, you are now calm. You survived. Your body and mind are safe from losing and you also made some profit. But wait! Your trade starts to rise again. Without you. “Damn it! I knew I was right. Why did I get out? What was I thinking? Yep, it hit my profit target too. FK!” The frustration of not sticking to your plan all of a sudden start to sink in and you begin to get angry and frustrated. Now you have to decide if you are going to keep trading or walk away. What I hope this scenario illustrated to you is that when your setup starts to appear. Your uncertainty will be unleashed. Your emotions will be triggered to protect yourself from losses, but instead you want to invoke your hyper senses, so you focus on your execution rather than the outcome. This is the emotional intelligence you are looking for in order to become profitable. I have linked any amazing idea to this article that I believe will help you just as much as this one. (NFA - Just my thoughts) Thanks for reading and have a success week ahead!
by FireCharts333
4
Ultimate Guide to Inflation Stocks What stocks fair well during inflation? This analysis was inspired because I had noticed that bank stocks tended to underperform during times of high inflation, but conventional wisdom was that bank stocks should excel at times of high inflation. So I decided to look at this statistically. I looked around online and shocked that I was not able to find a type of analysis like this! So let’s get into it. What I did was plot out the monthly inflation rate in the US from 1980 till 2021 and compare it to bank stocks. This itself was a hugely labor intensive process, so I figured, I might as well compare it to all the major ETFs as well, including SPY, USO, DBC, GLD, VNQ, XLF and BRKB. The correlative results are summarized in the chart below: And there you have it! But let me explain this chart in simple terms. I will break it down by type. Bank Stocks & XLF Interestingly, bank stocks underperform during times of inflation (Stocks included BAC, C and JPM). We see this by the negative Pearson correlation. This means the relationship is inverse. As inflation increases, the value of bank stocks decreases and vice versa. However, what really is confusing is that XLF, the financial sector index ETF, is completely opposite. It is directly and statistically significantly linked to inflation. As inflation increases, so does XLF. This is extremely confusing, so I looked into XLF’s holdings and they have a sizeable holding in Warren Buffet’s Berkshire Hathaway (BRK.B). In fact, this constitutes the most of their holdings. So I decided to include BRK.B in the analysis and the results are, its inflation neutral. It doesn’t respond to inflation negatively or positively. Is this sufficient to produce the results? Probably not, but I can't be certain. To identify the cause I would have to break down every single holding and compare them all individually to inflation, etc. It would be much too labor intensive. Oil I tracked USO here, which tends to follow the energy sector including XOM. We see a clear positive link that is borderline significant. As inflation increases, so does oil (energy). The relationship is borderline statistically significant. It is significant enough to take notice with an R value of 0.327 (indicating a somewhat significant positive relationship). Commodities I tracked DBC, the commodities index ETF as the data was readily available to pull. Here, we see a clear inverse relationship. As inflation increases, commodities increase as well. This relationship is statistically significant with a R value of 0.414. Gold Conventional wisdom says that gold is a safe heaven for inflation. This analysis shows that Gold is neutral towards inflation. The R value is -0.081. While this does suggest SOMEWHAT of an inverse relationship, its not significant at all. You may ask, “well, I thought Gold was smart to invest in during times of inflation?” and the answer is YES! And this analysis shows why! Gold is unphased by inflation. Its growth is completely independent of inflation. It will grow regardless of the inflationary climate. This is actually the best investment, one that is not impacted by inflation at all! So whether we are in an inflationary environment or not, Gold is always a smart investment choice because it operates completely independently of inflation. Real Estate I tracked VNQ. The results show a positive relationship, meaning as inflation increases, so too does real estate (VNQ). The results are borderline significant. I wouldn’t call this overly significant, but there is an undeniable positive relationship. This also makes logical sense. Inflation tends to favour things that are based in tangible assets (such as real estate and commodities). SPY / SPX Interestingly, like gold, SPY and SPX is inflation neutral! I am really shocked by this but not really. I did do a post about inflation and stock market growth a while ago, so I kind of expected this. And because SPY has a variety of stocks, from financial services to energy and tech, I think this actually makes sense. This means that SPY, like Gold, serves as a solid investment that operates independently of inflation. I think many would like to disagree with this, but its hard for me to disagree with concrete data. But you have to understand that with inflation comes other factors that may have an effect on SPY. But inflation alone does not seem to produce any tangibly significant effect. Tech Stocks I tracked QQQ here. Tech stocks are neutral towards inflation as well, with an R value of 0.148. Technically and surprisingly, it’s a positive relationship! Which means, that tech seems to sort of rise when inflation rises. This is extremely interesting; however, I would not call this statistically significant. The relationship isn’t overly strong, but it is admirably stronger than SPY. I am a little surprised by this result. But overall, I would call this neutral. I am still very surprised by this result to be honest. Conclusion Based on this analysis, I would say the following actionable information: - In general, its always good to diversify your investments! - Gold, Tech, SPY and BRK.B are awesome investments at any time! They all seem to operate independently of inflation and do not seem easily susceptible to high inflation rates. - If you want dramatic growth during times of high inflation, DBC (commodities), Real estate and Oil/Energy would be the go to. - Bank stocks are not immune to inflation as conventional wisdom would have one believe. That’s it! This post was extremely labor intensive, it required a lot of statistical analysis and a lot of manually inputting data which took a lot of time. I enjoy doing this and I actually learned a lot, but if you like posts like this, feel free to leave a like on this and a comment with your requests and let me know that these types of posts actually interest people! Thanks for reading and take care! As always, safe trades!
SP:SPX
by Steversteves
13
SPY: The New NormalRemember, like, 6 months into COVID when everyone was like "Masks, not seeing your friends and family, and social distancing are the 'new normal'"? Well, welcome to the "new normal" of the stock market 2022 - TBD, with severe swings up and down at the flip of a coin and very little logic backing these moves. I mean, there is logic for this to come down, but like, retracing back from 415 to like 450 in a matter of days is ridiculous. But alas, I truly do anticipate this to be the new normal. If I had to haphazard a guess, the way SPY has been trading, I would think that we will be enduring this for maybe 2 ish years, just based on the tech bubble burst and the 2007/2008 crisis. I think we will probably fall roughly in the middle (this is just speculation) and so we can anticipate this to continue for the foreseeable future. Ideal situation is this nonsense comes to an end by EOY, but I am not holding my breath. But you know the good news? 4 months down!!!! Congrats! You've made this this far! Seriously though, if you are a swing or day trader and you have made it this far, even if you have been losing but still showing up, you deserve a kudos for your perseverance and patience! It has been trying times to say the least and you deserve praise! I was going to just post a stock levels post, with the ranges and breaks for tomorrow on various stocks tomorrow because those are the posts that help people make money! But, with the volatility right now, I just don't feel comfortable sharing this information until I see how tomorrow pans out. I will share the levels for SPY though, but keep in mind that right now, things are extremely volatile and I myself am reluctant to put too much faith in it! I will post one at some point this week with my usual stocks (QQQ, AMZN, BA, etc.). to hopefully help you all with some actionable info! Seeing futures right now just tanking hard, I do anticipate a bounce tomorrow and so I just wanted to issue a warning, don't FOMO short at market open tomorrow! Because I really do anticipate this to hard bounce. But for now, let's just recap where we stand with SPY. I will refer to my scatterplot, because I find the scatterplot far more powerful than the candlestick chart (statistics is the best!): So, here you can see that we have regained our progress towards that $400 mark, which just happens to be resting on that quadratic line. Great news! Currently, the linear line sites at roughly 320 - 340 ish dollars. But you can see how the linear and quadratic lines are moving targets, so each day that passes, the target incrementally increases. However, the interesting part about right now, is based on the quadratic line, this week, we should be resting at $400. Which means, that if we see SPY hit the 400 range this week, then we literally have made contact with our quadratic line and thus we have somewhat of a quadratic reversion to the mean! Which is FANTASTIC! Because then it levels the playing field and we can say that all of the indices have normalized back to their trading range. Will it stop at 400? No, I don't actually think so. 400 is the HIGH range of a pseudo normal trading range, we can expect it to overshoot this range down into the 300s. 400 is a psychological level as well, so I do anticipate some dramatic behavior around there, but statistically, things don't get really erratic until we hit that linear line. You can see this from the scatter plot, the price likes to bounce around above, below and on this line frequently. This is all interesting, to me, but what does it mean? Well, let me just summarize the key points of the data here: - 400 is fast approaching! Will it be this week? Maybe! Data is promising in this area. - My more conservative time series model (the model that predicted a trading range between 446 and 436 last week), thinks that our range this week is 420 - 444. Same principles apply here. Bearish break of this weekly range would be closing below 420, bullish break would be closing above 444. I am hoping to see conviction down to 400 this week, I think that this is in the realm of possibilities based on what we have seen thus far. - Based on futures behavior and RSI, I anticipate a bounce on Monday. If this continues to sell into Monday, I will be floored. Because that would be pretty shocking to see such conviction from SPY after all of the games it has been playing lately. - ES futures model data thinks that SPY will probably not be able to break over 436 tomorrow. - My actual SPY model places a trading range for tomorrow between 420 and 434 with a bullish break being over 431 and a bearish break being a break below 423. - After the dramatic moves we had Thursday and Friday, probability has vastly been shifted. We are now sitting roughly over 53% to see closes below 442. - Consensus among the calculations is that this will cap out at 444 if it does see the 40s again this week. Let's hope that that holds out as true! It is promising that both calculations and my time series model places 444 is kind of the top. That's it! Trade very cautiously tomorrow if you are a day trader because it will be wild! Thursday and Friday were no bounce city, and I hate days like that! I am happy to see the selling, but I hate when there are no bounces. Take care everyone! Leave your questions/comments/critiques below.
AMEX:SPY
by Steversteves
28