 Hey everyone, this is Dan. Let's talk about the recent market correction. As of last Thursday, S&P was down more than 10% from its previous peak. On Friday, the market had an impressive rally and recovered 2.48%. We are now 8% below the peak. In the meanwhile, the Fed had its FOMC meeting and announced last week that they were going to start raising interest rates and reducing asset buying so that they can control inflation. Back in 1982, the Fed also raised interest rates to control inflation. Back then, S&P eventually dropped 21% before inflation was brought to the level that was acceptable by the Fed. Will history repeat itself? Are we going to see a 21% market crash? I analyzed the data from 1982 and found something very interesting that I want to share with you. I will also talk about my investment strategies in light of what I found. Let's get into the details. First of all, I'd like to mention that I'm not a financial advisor. I share my investment strategies and analyses for entertainment and educational 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. Because we have a lot of data and facts to cover in this video, it'll run for more than 35 minutes. I know that's a long time and if you don't have 35 minutes to listen through the entire video, you can use the table of contents below this video to click to the different sections. Let's continue. This is the chart for the S&P 500. As you can see, it peaked on January 4th and then it started to head down, down and down, and eventually it was down about 12%. And then it bounced up and then it went down again for a few days and then as of last Friday, it went up impressively by 2.5%. As of now, we are sitting at a point where we are 8% from the previous peak. Will the market continue to go down? Let's talk about it in the next few minutes. I'd like to mention that I firmly believe the Federal Reserve Banks have more influence on the current stock market than any other factors. These two charts improve my point. The blue line is the S&P that's from 2017 to 2022. And as you can see, we went through this dip, which was the pandemic dip and S&P went down by more than 30%. During this time, the green line, which is the Fed funds rate that pretty much drives the rest of the interest rates in the market was dramatically reduced from 2.5% to near zero right at the start of the pandemic because the Fed anticipated hardship in the market with the shutdown on the economy because of the pandemic. But that's not the only thing. If you look at the chart on the right, again, the S&P 500 line with the pandemic dip and the orange line is the Fed total assets. That's the amount the Fed is holding on its balance sheet by purchasing securities such as Treasury bills and Treasury notes, as well as commercial mortgages. Before the pandemic, it was running between four to $5 trillion. And then once the pandemic started, it quickly ballooned up to $7 billion. And then it continued to go up in the last year. Now it's at about almost $9 trillion. Basically, in the last five, six months, it's been going up at the rate of about $120 billion a month. If you look at the value of the S&P 500 before the pandemic, at the beginning of 2017, it was at about $2,200. And now it's at $4,500. And then if you look at the total Fed assets, it went from $4.5 trillion to now $9 trillion. It's interesting that the Fed asset doubled during this time. And coincidentally, the S&P 500 also doubled during this time. It is a logical outcome because the companies in the market did not change that quickly, producing the same number of products basically, but the amount of money in the market double. And with twice the money chasing the same goods, it's no wonder that the price of the goods in this case, the stocks, doubled during this period because of doubling of money supply. Now the Fed is talking about Titan. What's going to happen? Is everything going to come down? There is a chapter in our history that we can reference, which is 1982. And I will be talking about what happened in 1982 in the next few minutes. This is a section from the FOMC statement issued last week on January 26. It said with inflation well about 2%, actually it clocked in at 7% as of December. They believe it will be appropriate to raise the target range for Fed funds rate and reduce the monthly pace of its net asset purchase. Furthermore, they said they would bring asset purchases to an end in early March. I don't think bringing asset purchase to an end in early March is realistic. I hope they will change that, but let's see what happened. If they do implement that, we could be looking at a 21% crash or even more. I will explain why. And then after the FOMC meeting, as usual, there was a press conference held by the chairman of Federal Reserve Banks, Mr. Jerome Powell. And during the press conference, he made the following statement. He said they would bring them, which is asset buying, to an end in early March. We stated that. Again, I hope that's not going to happen so quickly. And that they would try to get inflation expectation well anchored at 2%. So that's the inflation target. Talking about inflation, this is the information released by the Bureau of Labor Statistics. Back on January 12, 2022, it said that over the last 12 months, the all-item index, as in CPI, Consumer Price Index, increased 7.0% before seasonal adjustment. How does 7% compare to the historical data? It is a chart published by the Federal Reserve Banks. And if you look at where we are now, we are at this point, 7%. Indeed, in the last year or so, the inflation rate as represented by CPI jumped up very quickly. If you look back in history, we are at the point where we are higher than almost any point in history, except if you go all the way back to 1982, then you can actually then find a data point that's higher than a 7% CPI. Actually, back in 1980, it was as high as 15%. And that's our focus. What happened during this time? And what did the Fed do to the economy and to the market? Are we going to be experiencing the same things? Let's look at it now. If you believe that the Fed has very strong influence over the market, which I firmly believe so, then we need to understand what the Federal Reserve Bank's missions are. In one of the Fed's planning documents, it was stated that their duties fall into three general areas. Number one, maximum employment and stable prices. That's related to the unemployment rate and CPI. Second objective, supervising and regulating banking institutions. Third objective, providing certain financial services to the U.S. government. No way here mentioned that the Fed is supposed to babysit the stock market. The Fed does care about the stock market, of course, because if the stock market continues to crash, it will eventually bring in a recession and cause very high unemployment rate. But the primary objectives of the Federal Reserve Bank are to control the unemployment rate and the inflation rate, such as CPI. The stock market is only secondary. We need to understand that. So what happened in 1982? I've represented what transpired from 1978 to 1984 with this chart. There are several very important lines on this chart. First of all, since we're talking about the stock market, I represented the S&P 500 with this blue line, and then the Fed funds a green line, CPI representing the inflation rate, the orange line, and then the unemployment rate, the black line. And then I label several critical points and try to understand what the Fed was trying to do and what was happening with the macroeconomic conditions. Here's what I observed. First of all, at point one, which is in the middle of 1979, CPI was running at 12%, definitely very high, unemployment 6%. Actually, it's higher than the unemployment rate now, which is about 4%, but back then 6% was considered to be a little bit high, but still kind of acceptable. S&P was going up nicely. It's been going up nicely since 1978. And because of high inflation, the Fed decided to raise the Fed funds rate. And then as we get to point number two here, the inflation rate, CPI continue to go up in spite of the interest rate increase. Unemployment rate, unfortunately, went up to 7%. S&P by that time is down 7%, maybe because of the increase in interest rates. And what's the reaction of the federal reserve banks? At that point, they lower the Fed funds rate. And I've highlighted what I believe to the main factors for the rate decisions. I believe at that point, because of the rising unemployment rate, they were thinking that, oh, that's not good. We're probably going to bring on a recession. So they started to lower the rate. And also S&P was down 7%. And then at point three here, interest rate has come down quite a bit already. And in the meanwhile, CPI is still high at 12%, although not as high as the 15% point. So it started to go a little bit lower. It looks like all the Fed actions there started to have some effect. Unemployment rate pretty much foretold at 7%. S&P was going up at that point again. And what did the Fed decide to do? To increase interest rates again, because apparently the CPI was still high. Unemployment rate was a little bit higher, but not at a point where it's too alarming. And the market seems to be doing well. So let's jack up the rates again. Then we got to point four. CPI continued to go down at 11%. Unemployment was up a little bit at 7.5%. S&P is near its historical peak level. At that point, because unemployment rate was heading up and CPI is heading a little bit lower, although it was still high, then Fed decided to ease up and started to lower the rate again. And then at 4A, which is an interesting point, CPI indeed came down quite a bit. Now it's at 8%. Unemployment rate had even further up. Now it's at 8%. And S&P is down 8% already. At that point, what did the Fed do? They decided to increase the interest rates. In spite of the fact that S&P is down 8%, that's not familiar. That's exactly where we're now, down 8% from its previous peak. Unemployment rate, 8%, that's pretty high. And CPI was already down from 12%, 15% to 8%, but the Fed decided nevertheless to increase the interest rates again. And from what I heard, that's because the Fed Chairman at the time, Mr. Paul Volcker, decided that 8% was still high. He absolutely had to wring, that's his word, quote, wring the inflation out of the system. And then when we had to point number five here, CPI continued to go down inflation to 5%. Unemployment now is at 11%. This was a full blown recession at that point. S&P is down 21%. That's pretty bad. At that point, the Fed finally decided that we've done enough. Then they started to lower the rate to turn around the economy to reduce unemployment. And then subsequently, because the rate got lower, the market started to recover after point number five here, that's a nice recovery. And then when we get to number six, inflation was at only 5%, pretty steady, and unemployment came down to 8%. Pretty high, but better than 11%. S&P is up. And then the Fed decided to raise the rate yet again. Looks like they were not happy with the 5% CPI either. Finally, when CPI went down to 4.5% at point number seven, and unemployment came down to 7%. And S&P was again down 9% from its previous peak, although that peak was already higher than that peak. So at this point, we're here. And the Fed decided inflation was finally under control. Unemployment was still high. And besides the market was down 9%, let's lower the rate. That's what transpired between 1979 and 1984. I am particularly interested at point 4A, because it is very similar to where we are now with where S&P stands down 8% from its peak, although our CPI is at 7% a little bit lower than 8%, and unemployment were at only 4%, much better than 8% at that point. And back then the Fed decided to increase interest rates. So it's no wonder that they have made a decision to increase interest rates at this point. Now, when the interest rates start rising, would that pull down the market? Like what happened back in 1982? And if so, is the market heading down to 21% or worse? When would the Fed believe they've done enough with the interest rates? That's a big question. Before we move on, I like to encourage you to click the like, subscribe, and notification button that will allow you to receive notification when I publish my next video. And it will also encourage me to make more videos like this in the future. Thank you very much. Let's continue. Let's look at today. Here I have a chart showing the situation from 2017 to January 2022. Again, S&P is represented by the blue line, CPI by the orange line, Fed funds rate by the green line, and unemployment rate by the black line. Again, I label several critical points. First of all, at point number one, that's pretty much at the end of 2019 beginning of 2020, the government knew the pandemic was coming. So the rate was lowered, the Fed's fund rate started to go down, and then came the economic shutdown. In February, unemployment rate shot up dramatically to 14% or higher, actually more like 15%. CPI at that point dropped to near zero, and S&P was down significantly. At that point, the Fed decided to lower the interest rate even further, of course, to almost zero, not surprisingly. And then today, we're at point three, CPI is at 7%, unemployment rate at 4%, S&P is down 8%, the Fed is talking about increasing the interest rates. As an investor in the stock market, you might say, what? We're already down 8%. How much more pain are you guys going to inflict on the market? But looking at the experience of 2082, the fact that it was down up to 21%, you might understand that 8% is not a stopping point for the Fed. Actually, it's probably far from it. If the inflation continues to be very high, I would not be surprised that the Fed might take the market down even further, provided that unemployment rate is still within acceptable range. And I'll talk about what that acceptable range might be. So if we compare today with point four AM5 back in 1981 and 82, you can see that we are just about at 4A, although we have a better unemployment rate. So that gives the Fed even more reason to increase interest rates. The question is whether we are going to be down 21% or more. That's a big question. Of course, back in 1982, the Fed was primarily using interest rates as a tool to influence the market. Today, they have been also using QE, which really started coming to play around 2008 during the Great Recession. If you trace the amount of QE the Fed has been doing since 2020, this is the monthly increase. First, I drew the line of weekly increase. It goes up and down. And if you add four weeks together and use that as a running sum, you get the blue line. When you draw the trend line here of the blue line, that becomes your monthly increase in Fed assets. As you can see, the trend line started out at about $150 billion to now about $90 billion, which was actually go as stated by the FOMC back in December of last year. So pretty much the Fed has accomplished its goal back in December of last year. Now they're heading even lower. And according to what Jerome Power said last week, they want to head to zero by March. And that means this line is going to go like this. And that's pretty dramatic. I hope that doesn't happen because if that happened, it's going to be a very brutal, sharp treatment to the market. And we might just see a 20% drop of the market or more if they do implement that. Although I have a little bit more confidence in the Fed, I'm pretty sure they will do what makes sense. And I would hopefully see the reduction in the Fed asset purchase to be a little bit more gentle. But we don't know yet. One of my conclusions. First, I believe the Fed policies will have the most impact on the market than most other factors. Of course, we can't completely know other factors, which I will talk about in a couple of minutes. And I believe the Fed will indeed raise interest rates and reduce asset buying as long as the following conditions are met. And these are completely my assumptions. What might happen actually could be a little bit different from these figures, but probably not too far from them. First of all, the CPI has to be greater than 3%. Then the Fed will be motivated to increase interest rates to reduce inflation. And as long as the unemployment rate is less than 5%. If the unemployment rate goes above 5% to 6% or even 7%, remember the other one of the Fed's primary objectives is to maintain high employment rates. And if unemployment shoots up, then they will definitely have to ease up on the interest rate to stimulate the economy. And if SPY, representing the broad market, standard import 500 is no more than 10%, 15% below previous peak. Even though back in 1982, the Fed allowed SPY to go down 21%, but I think the Fed nowadays is a little bit more sensitive to the market movement. I would say 15% is probably where they will be very alarmed and start thinking about easing up on the rate increase. But that's just my assumption. There's a probability the Fed might allow SPY to drop 15% to 20%, and that will be almost a full replay of 1982 if inflation continues to be stubborn. Then they will use the market drop as a shock treatment like what Paul Volcker did back in 1982 to reduce inflation. Of course, I hope that doesn't happen, but I need to prepare in case it does happen. My best case scenario was that in the next few months, S&P will be bouncing between 440 and 479. 479 is an all-time high, so it will bounce up and down within a 10% bandwidth while the inflation goes down to 3% and unemployment stays below 5%. That's the best case scenario. Because if it happens like that, it will prevent the Fed from doing anything dramatic to crash the market anymore than what we've seen so far. If you want to understand the US market, we need to also look at the rest of the world. Here, I'm drawing three lines representing the US, the EU, and China. The blue line is S&P 500, as you can see we've dipped 8% from our recent peak. The DAX index in Germany representing the health of the EU market actually started dropping four months before we did here. And the China market has been even worse shaped. Their decline preceded our decline by at least 6 to 7 months. So what are they doing in Europe and in China? In Europe, they also have high inflation at 4.9% in November, so December is probably even worse. So then pretty close to where we are as far as inflation and the ECB, European Central Bank, they want to exit the QE program. They are starting to tighten as well. So if we are going to be tightening, they're going to be tightening. That's going to be a multiplying effect to bring down the war markets. And that's the scary part. That's the part that we need to be prepared for in case it happens. Although in China, because they've dropped so much already, the government now is actually loosening the monetary policy. They have cut rates, which is the opposite direction of what the US Fed is trying to do. In the meanwhile, you probably heard about the situation in Ukraine, the tension building up between Russia and Ukraine. If there's going to be a war that will definitely sink the market, although if it's just limited to a regional war, then the market will only be down for typically 1 to 2 months, then it will bounce back when there's peace later on. Although I do hope that there's not going to be a war in Ukraine. Let's hope for the best, but we need to be prepared for that if it does happen. In the meanwhile, on Thursday after market, Apple came out with a very impressive quarterly report. And because of it, the Apple stock shot up on Friday, which brought up the entire stock market as reported by Barons. We have Google reporting their quarterly earnings on February 1st, Facebook February 2nd and Amazon February 3rd. I believe all three companies will announce pretty impressive earnings, and that will also help shore up the market. So that's a little bit silver lining at the edge of the cloud. Let's look at the chart more closely. This is a SPY chart. As you can see, we have this dramatic dip in the last two, three weeks. At one point it was down to 420, and that was about 12% from its previous peak. And then it recovered a little bit, and then it bounced up and down for two, three days. And Friday there was impressive rally. If you look at the RSI indicator, it's certainly oversold. DMI has been bearish since two, three weeks ago. MACD has been bearish since two, three weeks ago. So overall, on a daily chart, we still have a very bearish picture. If you zoom into the hourly chart for SPY, the chart has been following this slightly downward sloping channel. And then fortunately, as of last Friday, it broke above this channel. If you look at RSI, it's not quite overboard yet, but getting close to being overboard on an hourly chart. And DMI termed positive bullish in the middle of Friday, and MACD termed bullish pretty much in the beginning of Friday. So on a short term, it's bullish. My prediction is that the price will most likely maybe go up a little bit, and then eventually it will come down and test this upper line of the channel. And if it drops below that line, then hopefully this bottom line of the channel, which is around 420, will provide support. And if it does go below 420, and that will be very bearish. At that point, I might sell more of the long positions in my portfolio. I will talk more about that. And that's why we need to be very mindful of these critical support points. If you look at QQQ on a daily chart, it looks very much similar to SPY. It came down here, and then bounced up a little bit, and then up and down for two, three days, and then Friday there was a big rally led by Apple. QQQ at this point is 14% from its previous peak, more severe drop than SPY at 8% from its peak. On the IRS line line, it's oversold at this point, and DMI has been bearish since about four weeks ago. MACD has been bearish since four weeks ago. Over on a daily chart, it's a very bearish picture still for QQQ, unfortunately. IWM representing the small caps, it's down 20% from its peak. They have suffered a lot more severe drop than SPY and QQQ, and their support line will be at 188. So in the next few days, I will be monitoring this 188 line very carefully if the price drops below that, and it's not going to be very good. IWM did not enjoy as big of a rally as SPY or QQQ. Apparently, Apple is not among the stocks held by IWM. That's why it didn't benefit from Apple. If the Fed is going to be raising interest rates more and more and quickly, looks like IWM, the small caps, will probably lose more value than the broad market as represented by SPY and QQQ. Small caps is probably not the place you want to be putting your money at this point. RSI is indicating an oversold situation, although that probably doesn't mean much if the Fed is going to continually increase interest rates and drive down the stock market in order to control inflation. DMI has been bearish since 3-4 weeks ago, MSCD has been bearish since 3-4 weeks ago. Also a very bearish picture. For me to look at what the market will be doing in the next few hours, I like to use Google Trends. Here's what I do. First of all, let's look at how Google Trends could be a good predictor of imminent market movements. I'm drawing the Google Trend chart here for the past 12 months. The red line here indicating the number of searches in Google for the phrase market crash. That's my fear indicator. And the blue line here represents the number of searches of the phrase best stocks to buy. And that's my bullish indicator. Whenever the red line is about the blue line, that means the market is going bearish. You can see that the blue line was up above the red line between January 31st and February 6th. And of course, we reached a short term peak at this point. Then the blue line went down. The red line went up. And sure enough, the market dipped. And then the red line reached a peak at this point, which is between September 19th and September 25th, 2021. Sure enough, there was a bottom here. And then again, as of last week, the red line peak between January 23rd and January 29th. And that's why we have this 8% dip with S&P. Shorten the timeframe. Look at the past seven days. You can see that the red line peak at 12 noon, January 24th. And sure enough, the market reached a bottom at exactly the same hour. And then the red line continued to stay above the blue line, although it never really spiked up like what it did on January 24th. And then the S&P started to ping-pong up and down along this channel. And as we see this red line not shooting any higher than this peak, we could have predicted that maybe the market is not going to sing any lower than this bottom line here for 20. And that's how the Google Trends could be used for predicting market movements. Some of the YouTubers and financial analysts have been recommending the buy and hold strategies. They are saying that, hey, if you pick stocks with good fundamentals, don't worry, it'll eventually recover. You should not be affected by the noises in the market, etc. etc. Yeah, that might be good advice. But depending on what you're holding your portfolio, the buy and hold strategy might not be optimal for you. For myself, I hold certain stocks that have fairly high volatility. And that's why I've been holding some of my shares and swing trading the rest of my portfolio. If you look at the past market corrections or crashes in terms of S&P 500 performances, for example, the famous 2000.com crash, the market was down 51% and it took 8 years for S&P to recover. That's pretty significant. Of course NASDAQ was down much more than 51% and took more than 10-15 years to recover. The question is, can you wait for that long? And also, if you hold certain shares of companies that are not solid, a lot of companies just went out of business back in 2000 and their stock's values became zero, a big zero. And then the great recession between 2007 and 2008, S&P went down 53% and it took five years to recover. Between 2015 and 2016, there were two dips. It eventually went down by 15% from its previous peak and it took 11 months to recover. And then the 2018 correction was down 20% and it took six months to recover. And then 2020, the pandemic crash took the market down 45% and it took only six months to recover. And that's because the Fed was pumping money into the market by way of QE, but the Fed has stated that they are not going to do that anymore. And that's why we cannot be so optimistic compared to 2020 when the market started to recover. And 2022 now, we are down 12% at the bottom and then we will cover a little bit. So how many months would it take for it to recover? How many years and will the market go down even further? Like 20%, even 50%? We don't know yet. That's why we need to be prepared. So what are my crash protection strategies? First of all, us the market was going down when it was down about 3-4% or more. I already sold some shares to lock in my profits or to cut losses. I sold BNTX, BioNTech shares, Moderna shares, and actually after I sold those shares, they continue to go down even more. And I've since then bought back some BNTX shares that I have told my Twitter subscribers a couple of days ago. I also sold some of my ASML shares, AMD, NVIDIA, Royal Caribbean, and some TQQQ shares. I've been swing trading TQQQ and SQQQQ in the last few days. I made some small profits on those. As I mentioned, I've been trading SQQQQ to a hedge against downturns. I've been monitoring SPY especially daily 150 and 200-day exponential moving average because those are major support and resistance levels and also the weekly 50 EMA and other key support resistance levels. I'm also monitoring QQQ. I will sell more long positions if critical support levels are breached, especially the SPY 420 level that I mentioned a couple of minutes ago. I will continue to monitor Fed actions, Google trends, and I will monitor RSI, DMI, and MSCD for signs of recovery. I will definitely monitor the situation in Ukraine. Hopefully there won't be a war and I will keep the stocks with good fundamentals such as Google, ASML. I'm still holding the BNTX shares, especially the ones I bought a couple of days ago, and FISA shares and some other stocks. In the meanwhile, I've kept some shares of recovery stocks such as Royal Caribbean and Southwest Airlines and I will continue to update my Twitter subscribers on a daily basis. At this point, I'd like to remind you to subscribe to my Twitter account, which is DanMarketL. For example, on January 24th, I said I sold my SQQQ share at a profit because the market was bouncing a little bit and SMP was getting support and SPY seemed to be getting supported for 26. And then on January 27th, I bought BNTX share because of some positive news regarding BioNTech and also the PE ratio of, oh, by the way, instead of calling it BioNTech, I was informed that the correct German pronunciation is more like BioNTech. So from now on, I will try to pronounce it as BioNTech. The PE ratio of BioNTech at that point was at 4.5, which is a bargain. That's why I decided to buy more shares. And then as of yesterday, I mentioned that SPY and QQQ close above the top line of the triangles. Actually, in this presentation, it looks more like a downward sloping channel. So the prices of SPY and QQQ pop above the top line of the channel. That was a bullish sign. And I mentioned that if SPY continues to stay above the 200 EMA of 439 and next few four days, the market will most likely recover, at least for a few days. Then the rest, I believe, really much depends on what the Fed is going to do with the asset purchase and also with the interest rates. If you like what you've seen so far, I'd like to encourage you to click the like, subscribe, and notification button. As usual, I very much welcome your comments, questions, and suggestions. This wraps up my video for now. I will chat with you again in the next few days. In the meanwhile, be careful, and I'd like to wish you the very best of luck.