SPX | Spaaace!!!Spaaaaaaaaaaace!
Let's make a quick party, also bring a cake to celebrate! Make it quick, because it's late and I am tired and I should be sleeping by now.
We have reached the top of the world. Well, equities have. It is time for them to lose value big time. Their successor is here, bonds. I have talked about it extensively in my last idea.
This is an urgent idea I wanted to post. It seems that day-by-day we might be witnessing the peak in equity price.
And this idea is dedicated to the person who gave me the crazy idea to analyze something like that.
The idea is simple. We all know the immense yield inversion, it is definitely ugly... What if we found a way to analyze SPX based on the yield inversion itself? That is the idea of @CryptoTaoist and I am very thankful for it. All credit and all the likes this idea gets, are dedicated to this person!
Yield curve is a way to calculate money creation (normal times) and money destruction (inverted times).
Green is good for money, red is bad. No wonder dollars are green but flammable!
We also know that yield inversion is strictly bound to recessions. I will naively try to add these two together, equities and inversions to get an idea of when the recession is actually beginning.
Me and others have posted about how the US isn't in a recession yet. This can be seen if we multiply SPX by yields. In a sense, this year we had no recession for the US economy.
Please bring a real cake, not this lie...
The next part is analyzing whether SPX is performing good or bad considering the current rate of money creation / destruction. In a sense, dividing SPX by the yield curve. If you calculate the yield curve as US10Y-US02Y you will have trouble analyzing it compared with SPX.
Captivity of Negativity. Zero values for the denominator make a mess of the chart.
You could instead opt for a bodge, to fix the denominator by adding 1.
While this works, it is not harmonic enough for my liking.
I will create a new yield curve, but instead of standard yields I will calculate it using modified-yields.
More about the modified-yields in this idea below.
The new yield curve (in blue) is following the standard yield curve (in orange). So it can be considered a satisfactory replacement.
Do note that on the numerator we have modified(US10Y). On the denominator we have modified(US02Y+1). I add this +1 so as to further normalize the chart. In normal times US10Y and US02Y have a difference of ~1%.
To conclude, we divide SPX with the modified yield curve and we see the following:
A surprisingly smooth chart shows us what we expected, that the US isn't in a recession yet. It is also incredibly straight, from 2010-2022 and today. This means that yield curve and SPX correlate very well, if we modify them appropriately.
In a sense, dividing SPX by the yield curve calculates the following:
How much SPX increases as money gets destroyed?
If SPX can swim against the tide (money destruction) this means that it is very strong. A strong economy can hang on even when money is destroyed. US hanging on even with that immense of money destruction, means that it was (and perhaps still is) a very strong economy, which can withstand a heavy beating.
Note: DGS2 is a good replacement for US02Y if you want to analyze old historical data. Feel free to notify me of indicators that calculate even older yields of the 2 year bond.
But where is the ceiling in this chart?
While the 2.0 Retracement proves a significant resistance point, it is inconclusive of whether it is the terminal ceiling.
One answer may lie in the following chart:
(I knew the cake is a lie!!!)
We have divided by M2SL and multiplied by 10^12 to bring numbers to measurable scale. A normalized chart appears, and we also observe a curious ceiling appearing.
Price obsessively tries to penetrate this ceiling, just like DJI/M2SL did in 2018-2020
Are we witnessing the very last weeks of the equity bubble?
Tread lightly, for this is hallowed ground.
-Father Grigori
Captivity of Negativity is a reference to Bagwell of the Prison Break TV Series.
