(Testing in progress) Risk ON/OFF determination model
Due to lack of experience, it was difficult to make risk-off decisions and decisions, so I bought in April and cut losses repeatedly. I've summarized those reflections below, using the title of the label.
[model]
Conditions for the emergence of a downward trend in stock prices (example)
[1] Rapid rise in interest rates (red △ in the figure above)
[2] Interest rate limit exceeded (red □ in the figure above)
[3] Recession (rapid rate cut)
[4] Deflation (extremely low interest rates)
[5] Others (natural disasters, geopolitical risks, law/system changes, advance market assumptions, etc.)
Note, if it does not fall under the above, the situation becomes inflationary, so a rough macro upward trend in stock prices can be read in past data even while interest rates are being raised moderately.
Regarding the above [2], which we are facing now, the interest rate on US 2-year government bonds (yellow line in the figure above, is it generally about 4.7 to 4.8 under current conditions?) Using it as a guide, it was possible to determine risk ON/OFF, and the following recommendations were made.
/Reference Youtube by Okazaki Ryosuke 2024/04/19 https://youtu.be/cM4vGZO5nbA?si=w3xQkGp_C9_sXAYk
As for the reason for the rise in commercial interest rates, whether it's because securities market MMF interest rates are higher than deposits, or because banks sell government bonds to prepare commercial real estate demand loosened and FDIC insurance premiums, or because banks sell government bonds to raise cash with the end of BTFP in March, or because losses on US government bonds are progressing while interest rate cuts in FF interest rates are far away, or because interest rate cuts in FF interest rates are far away, etc. I think further complex information collection, analysis, and discussion is necessary, such as whether damage to the fund circulation system has occurred in an area where it is not there, and whether a recession has already entered.
/Reference Youtube by Money Health CH 2024/04/14 https://youtu.be/9EZOKQI21e0?si=l5pgSJojhQHTLG56
This model is just a macro guide. I don't know if it will be established forever and permanently in the future. There will be many exceptions depending on individual stocks and industries, and there will also be fluctuations in stock prices due to other reasons.
Around the 2008/09 Lehman shock, stock prices continued to rise even when the US 2-year bond interest rate had risen too much, and after the cash cycle in the real estate market was broken and recession began, stock prices were sluggish and plummeted further, and a rapid reduction in FF interest rates were carried out. Stock prices have not fallen due to exceeding the judgment value (yellow line) described above [2], and no strict model match has been seen, but I think it is possible to be wary of the above [2] and risk off when entering [3] above.
Nikkei stock prices plummeted, probably because there were many people around the world who made risk-off decisions due to the report of the direct confrontation between Israel and Iran on 4/19. At that moment, Japanese government bonds and US bonds were bought, and not only did they shift to an appreciation of the yen, but the dollar index also increased at the same time, an unusual phenomenon that should be called “appreciation of the dollar and appreciation of the yen” was observed. However, once it settled down, US government bonds were sold again, interest rates on US government bonds rose again, and the trend of appreciation of the dollar and depreciation of the yen returned. The next morning, we were able to confirm that US stocks also showed a corresponding downward trend, as this model suggests. Similar feelings and a wide range of possibilities, etc. were also expressed in the following references, including fundamental insights such as strong performance and weak guidance.
/Reference Youtube by Emin Yilmaz 2024/04/19 https://youtu.be/7o3danmGMMo?si=Eo8XaXi8N8o7es6k
Even if FF interest rates are kept constant, if US government bond prices are not controlled, an additional interest rate increase effect will occur due to commercial interest rates, and depending on the extent, they will substantially fall under the above [1], and stock price declines will accelerate. If that intensifies, it may be possible to risk off from the bulllong strategy and switch to a bear short strategy to turn the risk back on.
You won't know the truth about the future until you see it in the future. As for models that have not yet been defined, even readers are asked to verify them in various ways, and make all judgments and decisions at their own risk.
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