The Great Market Crash [GMC] Watch

The Words-Game Players [WGPs]

The year, far back, reminds me regretfully of the exchange of more than three-dozen comments with a few of words-game payers [WGPs] about “Black Swan [‘BS’]”. I used the term in my first article and several articles.

In one article, I said something like “My research outcomes suggested we do not expect a “BS” this year.” This triggered at least a half-dozen WGPs who are not interested in the discussions of the text, but really excited to define “BS” in every angle and all aspects.

To save my writing time, by blocking the attack of the WGPs, I coined “Great Market Crash [‘GMC’]” replaced “Black Swan [‘BS’] in my article recently.

How To Watch the GMC

The FRB Chicago’s Model and Others

The Chicago Fed National Activity Index ("CFNAI") is a real time model to get a signal for turning points of economic activity. This model is really reliable, using 85 separate economic series.

The Organization for Economic Corporation and Development [OECD], an international agency, and Refresher (a private company) have their GDP forecasting models. I, nevertheless, don’t give their models a high weight.

The Rule of Thumb

The convenient tool is the Rule of “N2Q”, indicating that the continuation of the negative growth rates in the real (inflation-adjusted) Gross Domestic Product [GDP] in two consecutive quarters would begin a recession.

The problem of this method is real GDP: It is not monthly data. The quarterly number is available with a long time-lag. Also, it is inflation adjusted.

Nowcast and GNPNOW

Now, however, two reliable sources are available: 1) The New York Fed's FRBNY Staff Nowcast started April 2016. As a result, we can use these two GDP growth rates every week. 2) The Federal Reserve Bank of Atlanta, which has published its own regularly updated GDP estimate, GDPNOW since July 2014, and GDPNOW takes 13 subcomponents that go into GDP.

The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our Nowcast and GDPNOW forecasting models provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.

Nowcast and GDPNOW are not an official forecast of the New York Fed and Atlanta Fed. Rather, they are best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to Nowcast and GDPNOW—the estimate is based solely on the mathematical results of the model.

On Jun. 02, FRBNY’s Nowcast was 3.8%, and FRB Atlanta’s GDPNOW was 2.0%. The average of the two was 2.9%.

As a result, U.S. Real GDP growth rate was pretty high, so a recession will not occur in the foreseeable future.

What Should We Do?

Wise sailors prepare for coming storms when sea is calm, so do prudent investors. When the nine-weeks old uptrend, starting on March 31st, has been confirmed every week and month to month, and today (Jun. 2nd) the market surged.

Step 1: Tracking GR by the "N2Q".

You should check Nowcast of the NY Fed or GDPNOW of the Atlanta Fed or both. You may take either estimate or the average of both. Currently any negative estimates for two quarters in a row are not anticipated within a couple of years. Even when we have a N2Q, don't jump to a conclusion that we have a GR. That's why the following two steps are needed.

Step 2: Examining GR by the inverted yield curve ("IYC").

The IYC would lead to a recession in several months ahead. All you have to do is simply to view the Treasury yield curve in the Wall Street Journal at least every month.

Step 3: Accounting GR by the coupled Equity and Bond such as VTI (Vanguard Total Stock Market ETF) and BND (Vanguard Total Bond Market ETF).

Normally one is down and the other is up.

The necessary and sufficient condition of "GMC" and a "GR" is that stock prices and bond prices are coupled with a sharp plunge of both, and a surge of trading volumes.

Step 4: Monitoring a Down Trend by the "Paper-and-Pencil Only" [PPO] Approach.

The "PPO" Approach has tracked the current uptrend successfully for two months. We do not know when the U.S. economy will peak and start to decline. When the down momentum and down trend will start, the "PPO" Approach is expected to trace the "GMC" and the "GR", nicely.

Concluding Remarks

The GMC (of BS) cannot be predicted. The Great Financial Crisis [GFC] happened suddenly. Some smart writers analyzed with pre-events (such as a very low standard of mortgage loans or the over-flowed mortgage derivatives globally, and so on), they claimed the GFC was forecast. But I don’t agree to it.

In any case, the GMC is hardly monitored. So, what should the individual investors like me, or you do?

In my opinion:

First, the four steps above are not only simple, but also it doesn’t take time too much. Only our due diligence is required.

Second, we have to build cash (which is not your pocket money or checking accounts), parking in online savings accounts or short-term Treasuries.

Third, interest-earning cash protects you when we have market corrections (up to -20%) or a bit higher, say -25% or -30%. When the market drops -40% or more, or more than -50%, your cash will make money by purchasing the plunged quality stocks and ETFs.

Keep that in mind since your 5-Year-Investment Plan [5YIP] is CASH during any time in the process, it not only Protects you, but also Produces big money in case of a GMC.