 Hey everyone, this is Dan with another episode of my videos about the stock market. On January 23rd, Michael Berry tweeted this chart showing the movements of S&P 500 from the year 2000-2003. He circled this particular area, that's when S&P rebounded from the previous low hit this resistance level 3 times then dropped by a lot more. Michael Berry wrote just one word, maybe. As you might know already, Michael Berry is a famous fund manager who correctly predicted the stock market crash of 2008. He shorted the market in 2008 before the crash and made $100 million for himself and $700 million for his investors. Related to Berry's later tweet, it's not difficult to guess that he was saying the market might drop more than 30% from today's level. I compared a few key economic data between this period and what we have today. I also compared the 1970s and 1980s with today and found that there is still a chance that we can have a soft landing. That means the stock market might be recovering and that we can avoid a severe recession as long as certain conditions are met. Let me repeat, I believe a soft landing and a market rebound from today is possible if certain conditions are met. I will talk about those ideal conditions in the next few minutes. Stay tuned. This is a screenshot of Michael Berry's Twitter message. As you can see, S&P 500 rolled over in March of 2002 and dropped a lot more after that. Let's take a closer look of the time period from 2000 to 2007. This is the time period that Michael Berry circled in his Twitter message. S&P reached the peak of 1552 in March of 2002 and then started to drop. After dropping 39%, it hit the bottom in September of 2001. It then rebounded 25% to this price level which became a resistance level. S&P tried to beat this resistance level two more times then failed and dropped another 34% before finally hitting the bottom in September of 2003 and started to recover. Let's look at what we have today. We can see the similarity between the chart today and the 2002 chart I showed a moment ago. S&P 500 hit the peak of 4,818 in January of 2022 then it dropped 28% and hit a bottom in October of 2022. It then rebounded 17% and has been trying to get above this resistance level of 4,070 not just once not just twice but three times. Will S&P drop another 20 to 30% from here? That's what Michael Berry is saying. If you like what you've seen so far, please click the like, subscribe and notification buttons that will enable you to get notified when I post my next video. It will also encourage me to make more videos like this in the future. Thank you very much. Let's continue. We have a lot of interesting stuff to cover. Let's compare the period from 2001 to 2003 with today. S&P is showing with the blue line, CPI, the orange line, the fat funds rate, the green line and unemployment rate, the black line. The main difference between 2002 and today is that back in 2002 we were struggling to get out of a market crash caused by the dot com crash. Many internet companies were going bankrupt back then. Today, the economy is still pretty strong. The reason why the stock market has dropped since 2022 is because inflation has been very high and that the Federal Reserve banks started to raise interest rates to try to combat inflation. If you look at the metrics on these charts, S&P 500 back in 2002, it first dropped, then it rebounded a little bit, and then it dropped again. If you look at the chart today, it dropped, then it rebounded. The big question is whether the stock market is going to take another big drop. The CPI back in 2002 was less than 4% to begin with, and then continued to fall. Today, the CPI went from about 1% up to 9%, then it started to fall, and the most recent CPI for December, year to year, was 6.5%. Actually the month to month CPI for December was negative 0.1%, which is very good. That means there's actually deflation between November and December of last year. The Fed's funds rate back then was falling, of course, because the Federal Reserve banks were trying to salvage the economy and to salvage the stock market back in 2002. Whereas the Fed funds rate today, it went from a low 0.09% about a year and a half two years ago to 4.1% today. The Fed will stop raising interest rates if the inflation rate continues to go down and starts to approach 2%. The unemployment rate back then went up from 4% to about 6%, indicating the economy was weakening during the dot-com crash. The unemployment rate today fell from the pandemic height of more than 10% down to 6%, and then continue to go down to 3.5% today. I believe a very important difference between now and 2002 is that back in 2002, there was a dot-com bubble bursting. Many companies were going bankrupt. The unemployment rate therefore went up from 4% to 6%. Today even though the CPI inflation rate is high and that the Fed is raising interest rates, the economy is cooling down but is still fairly strong, as indicated by the low unemployment rate of 3.5%. The CPI has been decreasing since August, September of last year because of the quantitative tightening of the Federal Reserve Banks, which started in March of 2022. If the CPI continues to fall and if the unemployment rate continues to be lower than 5%, I believe the stock market will hold up and will not drop significantly from where we are today. Another reason why I believe today is much better than 2002 can be seen on this chart. This is a chart showing the number of bankruptcies in the United States. In 2002, we were at about 40,000, today it's less than 15,000. That's why I don't think we will go into the same type of recession like what we had in 2002. With decreasing CPI, the Fed will most likely stop the rate hikes before June or July of this year and that's my optimistic scenario. Let's look at the 1970s and 1980s. This particular time period is important because that was the last time when inflation was above 8%. Back in the 1970s and 1980s, the Fed had to raise interest rates to reduce inflation. The end result was that the stock market dropped and there was high unemployment rate that actually went up to about 11%. What are the differences between the 70s, the 80s and today? If you look at the S&P, back then it dropped, rebounded a little bit, then it dropped again. Today, the S&P index dropped and rebounded. The big question is whether it will drop again. CPI, back then it went up all the way to 12% and with the aggressive tightening of the Fed back then it went down to 5% but then the Fed lost control of inflation and the CPI shot up to 15% so the Fed had to tighten again even more aggressively which brought about a recession in the economy eventually. That was pretty nasty back in the early 1980s. Today, CPI went up to 9% then started to come down steadily in the last 2-3 months and now it's currently at 6.5% year-to-year and as I mentioned is negative 0.1% month-to-month as of December. The Fed funds rate back then went up to 13% then down to 5% and then the Fed cranked it up again and let it go all the way to 19% before inflation started to come down. Today, the Fed funds rate went from 0.09% about a year ago to 4.1% and of course the Fed might stop the rate hikes within the next 3 or 6 months if inflation continues to go down. An employment rate back then went from 5% up to 8% and then dropped to 6% and then when the Fed tried to combat inflation again, the unemployment rate shot up to 10.8%. We had a pretty serious recession back then. Today, the unemployment rate came down from a high level because of the pandemic went down to 6% and continued to go down to a current rate of 3.5%. The economy is still pretty strong as of today. The main issue back in the 1970s and 1980s was runaway inflation triggered by the OPEC action on raising oil prices. The inflation rate went up then down and then up again back in the 1970s and 1980s. The Fed then first tightened then loosened thinking that they fixed the inflation problem. When inflation exploded again back in the early 1980s, the Fed had to tighten even more which caused the unemployment rate to shoot up to 10.8%. Even though the CPI inflation rate got above 8% in August of last year, instead of continuing to go up like in the 1970s and 1980s, the inflation rate has been coming down steadily in the last 3-4 months. So far, the unemployment rate remains at a low level of 3.5% in spite of the Fed rate hikes. If the CPI continues to go down in the next few months, the Fed will most likely stop the rate hikes and if the unemployment rate continues to be below 5%, I don't think the stock market will drop much below the October 2022 level. To sum it up, these are the conditions I believe will prevent a severe market drop. Number 1, the year-to-year CPI rate decreases to 3-4% within the next 3-6 months or the month-to-month CPI continues to be below 0.3%. Number 2, unemployment rate continues to be less than 5% and when the above 2 conditions happen, then most likely the Fed will stop the rate hikes within the next 3-6 months. In other words, if the above conditions are met, we can possibly see a soft landing of the economy and a decisive recovery of the stock market. Unfortunately, the sky will not be sunny all the time. There will be sooner or later a rainy day. To put things into perspective, I'd like to bring up the Schiller PE ratio. The Schiller PE ratio is defined as the stock price divided by the 10-year average earnings of all the corporations within S&P 500. If you look at this chart, the higher it is, the more overbought the market is and the higher the probability that there will be a market crash. As expected, this chart reached a peak in 1929 right before the big market crash which brought upon the Great Depression. And then again, we see another peak in the year 2000 before the dot-com crash. And then again, another peak at 2008 before the Great Recession. And then recently, as of January of 2022, we had another peak. Also today, even though it's lower than January 2022, we are still at a pretty high level. See, at today's level, we are at a point where it is higher than the 2008 level and just about the same as the 1929 level. So you might say that if we are going to go to the bottom reached after the dot-com crash in 2002, we are looking at a possible 20% drop of the stock market. What's the probability that the 20% drop will happen? My opinion is that it's not very probable. Why? Today's Fed policies are not guided by this chart. Yes, the stock prices today are still fairly high by historical standards. The reason why the stock market became so inflated was because the Fed had been pumping money into the economy ever since after the 2008 market crash. According to this chart published by the San Luis Fed, the Fed has increased its total assets by about $6 trillion since 2008. That means $6 trillion of money has been pumped into the economy since 2008. Why did the Fed do that? Because more money made the economy grow faster. It boosted stock prices and made the investors happy. It made everyone happy. The Fed did not think the inflated stock market was a problem until prices for consumer goods and producer materials started to go from 1-2% annual inflation rate to more than 8% inflation rate last year. If the inflation rate gets down to around 2% in the next few months, which is a target set by the Federal Reserve Board, the Fed will stop raising interest rates and the stock market will go up again. That's at least my optimistic scenario. Let's keep our fingers crossed. Let's look at another indicator. The Buffett indicator has been used by the famous investor Warren Buffett. It's defined as the US stock market value divided by the GDP of the United States. When you look at this chart here, where we are today, it's about the same level as 2000 right before the dot-com crash and definitely higher than the level before the 2008 crash. If you're going to drop to the level when the dot-com crash started to recover, then we're looking at the potential 50% drop of the stock market. From where we are today, is that going to happen? I don't think so, because the Fed is not guided by the Buffett indicator, nor is it guided by the Schiller-P ratio. It is nevertheless important for us to keep things in perspective so that we know what might happen, even if the probabilities of happening are not high. If the stock market does fall back to these historical low levels, we need to be able to see the early warning signs so that we can protect ourselves better yet. If we can tell the early warning signs of a deeper market crash, we might be able to profit from it, just like what Michael Barry did back in 2008. I'll be talking about those warning signs in the next few minutes. So what will cost a severe market drop? First of all, if we have persistent inflation with month-to-month CPI greater than 0.4%, then the Fed will continue to tighten and that will bring about a severe market drop and possibly a nasty recession in the economy. Or if the worsening economy is reflected in unemployment rate, that is higher than 5%. Of course, then people will feel a lot of pain and the stock market will go down with it. Our major escalation of the Ukraine war, as we know, the Ukraine war caused a lot of supply chain issues in 1922 and some of the supply chain issues have been resolved. But if the war is going to escalate, then we might be facing the same supply chain issues again, which will bring down the stock market. While we have another worldwide pandemic, for example, maybe if you have another variant of the COVID virus, then we can possibly see the economy go down again and the stock market go down again, like in early 2020. Or if there's a major collapse of financial institutions, such as banks or crypto exchanges, then we'll have a scenario similar to the 2008 scenario. In other words, if any one of the above conditions happen, then we could potentially have a very hard landing. I'm certainly hoping that it doesn't happen. Considering all these possibilities, what are my strategies? First of all, I have already started to nibble long positions, that means I have been selectively buying some long positions of companies that I believe have strong growth and strong fundamentals, such as ASML, TSM, Tesla, T-Triple-Q, the triple index ETF paid to the NASDAQ 100, SOXL, a leverage ETF paid to the semiconductor industry, and XPXL, the leverage ETF paid to the S&P 500 index. And I will buy long positions when the low CPI numbers are posted, month to month. I'll buy long positions of corporate stocks when revenues and earnings beat estimates. This is the earnings season now. The companies are announcing their fourth quarter earnings. For example, recently, Tesla announced its earnings, both the revenues and EPS beat estimates, and that's why I bought Tesla shares. And I'll talk more about that later on. I will sell some of the shares to take profit when the RSI indicator or the Bollinger Band or the trend line or historical resistance level indicates a short-term overbought condition. And I'll talk more about that later on using SPY as an example. I will buy long positions when the price rebounds at support level, or I will sell my long positions when key support level fails to provide support. Let's talk about a real example, SPY, the S&P 500 ETF. This is the daily chart since August. SPY has formed this triangular pattern. We have the candlestick line here representing the price movement of SPY. Then we have the Bollinger Band here. And then we have these dashed line that are the 50, 100-day and 200-day moving average. These are actually exponential moving averages. Then we can see the trend line here, the upper trend line in pink and the lower trend line in yellow, defining this triangular pattern. Currently, SPY is at around 405. So a couple of trading days ago, SPY already went above this upper trend line, which is a rather bullish sign. But at this point, I'm not going to buy additional SPY or any other long positions because we are in a situation where the market is already slightly overboard. If the market continues to go up and then come down a little bit and get supported and started to go up again, that's a point when I will buy more long positions. In the meanwhile, this historical level of 411 will be a strong resistance point. That means if SPY starts to approach that line, it might start coming down. And actually, at that point, I might even short the market and try and make some short-term profit. If SPY is going to come down a little bit because of the technical correction, then the next level of support will be at 389, this historical level. And then also the middle of the Bollinger Band, 20-day simple moving average at about 392, that will be another support point. And if SPY starts to get support at either 392 or this level of 389, then I will buy long positions. I will continue to swing trade for more profit. And then, of course, the next level down will be this particular historical level at 375. And then, of course, we have this very important historical bottom of 348 that was reached in October of 2022. If SPY is going to drop below 348, that will be a very bearish sign. That means what Michael Berry was predicting might be coming true. So if SPY falls below 348, I will be selling a lot of my long positions. And I want to buy them back again, hopefully in the future at much lower prices. Or I might even start buying short positions if SPY falls below 348. At this point, I'd like to suggest that you subscribe to my Twitter account, which is DanMarketL. With my Twitter account, I update my subscribers almost on a daily basis about some of the most recent market developments, my analyses, as well as some of my trades. For example, on January 12th, I tweeted that the month month CPI came in at a low negative 0.1%. And because of this development, I bought SOXL, expecting the market and the semiconductor segment to go up. And then on the same day, I observed that since SPY was going up that day, it was approaching the trend line at 397, and that would be a bullish sign, although it's hitting up against the resistance of 397. Later on that day, SPY started to be rejected from the 397 level, started to come down, and it looks like a technical pullback. And that's why at that point, I saw half of the SOXL shares I bought earlier that day at 4.6% gain. If you look at the picture, we were right around that point. See, SPY hit the upper bollinger band and was approaching this upper trend line. And when it started to go down, this one I saw and took profit. And then on January 25th, Tesla did the fourth quarter earnings announcements, shortly after market closed. And because Tesla's revenues and EPS both beat the estimates, I bought Tesla shares during aftermarket. And then on January 26th, the following day, Tesla's share went up substantially. I sold two-thirds of the Tesla shares I bought the previous day and took in 6.7% profit. I still hold the other one-third of the Tesla shares as of today. And then, of course, Tesla, as you know, continued to go up from January 25th and 26th. Thank you for watching all the way here. Again, I'd like to suggest that you click the like, subscribe, and notification button. As usual, I will very much welcome your comments, questions, and suggestions. I'd like to remind you that I'm not a financial advisor. I share my stock trading strategies and analyses for educational and entertainment purposes only. If you want to buy or sell stocks, you should make your own decisions and you should definitely consult with your financial advisors before you do so. This wraps up my video for now. I will chat with you again in the next few days. In the meanwhile, I'd like to wish you the very best of luck with your financial investments.