Is the Inverted Yield Curve a Bear Market Signal

Bloomberg just called the inverted yield curve the ‘harbinger of doom.” Is this a fact or fear mongering?

What is an inverted yield curve?

In the investment world, there is generally a strong correlation between maturity and yield. Longer-term maturities pay more interest than shorter-term maturities.

For example, 10-year Treasuries pay more interest than 2-year Treasuries. Since this happens most of the time, this condition is called a normal yield curve (blue graph).

But, we live in interesting times, and the yield curve is about to invert (red graph). This means longer-term maturities actually pay less than shorter-term maturities.

Harbinger of doom?

In fact, the short end of the yield curve – 5-year compared to 3-year (5/3) – has already inverted, which means that 3-year maturities actually pay more interest than 5-year maturities.

This has happened five other times since 1970 (red arrows on chart below mark occurrences since 1976). Only in 1973 did it coincide with a market top. The other four times, it took a minimum of two years before the next big correction.

The chart below plots the S&P 500 against a more popular yield curve, which compares the 10-and 2-year yields. The spread is currently only 0.11%, and it’s threatening to fall below zero for the first time since 2007.

The red bars mark all prior times when the 10/2 yield curve inverted. Although it led to bear markets in 2000 and 2005, it was not a consistent ‘harbinger of doom’ in the 20th century.

It’s also worth mentioned that the S&P 500 was down more than 11% before the yield curve inverted.

Conclusion

The facts show that using an inverted yield curve – 10/2 or 5/3 doesn’t matter – as a bear market signal is at best inaccurate, and at worst misleading.

However, and that’s a big however, that doesn’t mean that stocks won’t slip into a bear market. There are other reasons why stocks were ‘supposed to’ tumble.

My down side targets, published on September 3 (when the S&P traded around 2,900) via the Profit Radar Report, ranged from 2,575 – 2,289. That down side target was provided before the yield curve inverted.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Continued updates are provided via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

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S&P 500: Long-term Explains Short-term

In late October we were looking for a strong counter trend rally (S&P 500 projection published here), and wanted to short the S&P 500 in the 2,830 – 2,850 zone (red bar). The S&P fell short of our target, and relapsed at 2,817.

This week we wanted to buy the S&P 500 after a brief dip below trend channel support (2,615 – green bar). Again, the S&P fell short of our target, and bounced from 2,631.

Why is the market falling short of our targets, and what does it mean?

Long-term Outlook Explains Short-term Movements

Here is one explanation (in my humble opinion the most plausible one):

In mid-October I analyzed various indicators to help determine the S&P’s larger pattern, and ideally future path. Indicators included:

  • Breadth & momentum
  • Price patterns
  • Support & resistance levels
  • Liquidity & breath
  • Investor sentiment
  • Elliott Wave Theory
  • Seasonality & cycles

The entire analysis, along with the three most likely scenarios were published in the October 14 Profit Radar Report.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The chart and commentary below were published as scenario #1:

Scenario #1: The September high is wave 3 (primary degree). The current decline is wave 4. Waves 4 are generally choppy, drawn out, frustrating and nearly impossible to predict. Shown are the two most common Fibonacci retracement (down side) targets: 

— 23.6%: 2,500 — 38.2%: 2,228. Once this correction is complete, the stock market will rally to its final bull market high (wave 5). 

Although a new multi-year bear market with much lower targets is possible, the size of the bearish divergence at the September high and lack of absolute investor bullishness surrounding the top, suggest that scenario #1 or #2 are more likely than #3.”

“Waves 4 are generally choppy, drawn out, frustrating and nearly impossible to predict.” True to that! Although we correctly anticipated the decline from the 2,800s and the bounce from the 2,600s, the notion that the S&P is in a larger-scale wave 4 correction would explain why price keeps falling short of my targets.

Short-term Outlook

The hourly chart below, published in the November 27 Profit Radar Report, showed that 2,685 was a short-term inflection point, because that’s where a number of trend lines met up with an open chart gap.

As it turns out, the break above 2,685 uncorked quite a pop (I personally would have preferred a drop). Next resistance is not far away, but as long as trade remains above the breakout level (2,685), it can continue to move higher (likely in a choppy fashion) … and reach the 2,830 – 2,850 range missed earlier this month.

Nasdaq-100 – QQQ ETF

Unlike the S&P 500, the Nasdaq-100 QQQ carved out a bullish divergence at the November 20 low. The November 21 PRR stated that: “The Nasdaq-100 QQQ gave back most of its gains, but closed above short-term support. Since QQQ already carved out a bullish divergence, bulls already have their window of opportunity to take trade higher, as long as support around 160 holds.”

Bulls took advantage of their window of opportunity, but resistance is not far away, and RSI-2 is nearing over-bought.

Summary

First the S&P 500 missed our up side target (2,830 – 2,850), then our down side target (2,615).

This is likely caused by the unpredictable nature of choppy wave 4 corrections. Nevertheless, the weight of evidence suggests that the S&P will hit (and exceed) both of the above target zones in the coming weeks/monhts.

Continued updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

S&P 500: Short-term Outlook

This is a short-term S&P 500 outlook. A longer-term S&P 500 outlook is available here.

Below is a close-up look at the long-term forward projection in the October 21 Profit Radar Report and here. The original projection (in yellow) is drawn on a daily chart (instead of weekly) to show more short-term detail.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

As expected, the S&P rallied from 2,600. Although this rally met the minimum requirement (61.8% Fibonacci retracement at 2,812), it fell short of the ideal target at 2,830 – 2,850 (or higher).

When price fails the reach the ideal target (in this case 2,830 – 2,850+) at the first attempt, it often reserves the right to do so on a second attempt. On the other hand, the decline from the November 7 low has the ‘right look’ for the projected decline.

Up or Down?

The second chart shows some additional support/resistance levels. At yesterday’s low, the S&P closed the open chart gap at 2,685, which also coincided with the 61.8% Fibonacci retracement level.

It’s tough to pick a key level inside a multi-week trading range, and the S&P could trace out a variety of complex unpredictable patterns. For now though, we may be able to keep things simple by using the 2,685 level.

As long as the S&P stays above 2,685 (or quickly recovers after another brief wave 5 dip below), it may still move higher to reach the ideal up side target (2,830 – 2,850+). A move above yesterday’s high (2,747) is needed to further increase the odds of continued gains.

Continued updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

S&P 500: Pop and Drop?

In recent weeks I published several forward projections for the S&P 500. All of them had two things in common:

  1. A bottom somewhere around 2,600
  2. A rally towards 2,900

The first chart shows a progression of the ending diagonal (published in the October 24, 28, 29 Profit Radar Reports) we used to identify the bottom and subsequent pop (blue oval was ideal down side target).

The second chart is the longer-term projection published in the October 28 Profit Radar Report. According to this projection, the S&P 500 was to bottom around 2,600 and rally into the red box up side target.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Up side Target (almost) Captured

Since the up side target has almost been reached, it’s time to discuss the odds of a potentially scary ‘pop and drop’ scenario.

The October 28 Profit Radar Report stated that: “The projection (see chart above) provides a visual of the ideal path ahead. The upcoming bounce (either wave 2 or B) should reach 2,830 and perhaps higher (wave B could even bring new all-time highs), followed by another leg down.”

At the time, it was not important whether the bounce is wave 2 or B. Why? Both had the same minimum target (around 2,830). Now that the S&P is close to the minimum target, it’s important to know the difference.

Wave 2 vs Wave B

  • Wave 2: If this bounce is wave 2, it is not allowed to exceed the September high (2,940.91), and should ideally stop in the 2,812 – 2,869 range (61.8 – 78.6% Fibonacci retracement). Once complete, the wave 2 rally is followed by a strong wave 3 decline (along with waves 4 and 5).
  • Wave B: If this bounce is wave B, it could, but does not have to, reach new all-time highs.

The chart below includes a number of updated resistance/target levels:

  • 2,830: Fibonacci projection level going back to 2002
  • 2,853: EWT wave A = C
  • 2,869: 78.6% Fibonacci retracement
  • 2,880 & 2,921: Open chart gaps, which tend to act like magnets for price

As of Wednesday’s close, the S&P ended near over-bought, but without bearish divergences. This suggests short-term weakness should be followed by at least one more high.

Conclusion

It appears that at minimum another down/up sequence is required before a larger drop becomes an option.

Based on seasonality, continued gains and new all-time highs are possible.

I will be monitoring breadth, momentum and sentiment for extremes, internal weakness, or divergences to assess the odds of a serious reversal to the down side.

Continued updates will be available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

XHB and Facebook – 2 Buy Signals

Facebook

The following analysis was published in the October 28 Profit Radar Report:

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Facebook has been ‘wedging’ lower. It is now at triple support, shows a tiny bullish divergence, and cycles are turning strongly bullish. Upon completion, wedges like this are often completely retraced, which means the up side target is around 188. Aggressive investors may choose to buy Facebook.”

Facebook rallied as much as 12.49% since Monday’s low. Cycles continue higher, and (FB) should rally towards and perhaps beyond 188.

SPDR S&P 500 Homebuilders ETF (XHB)

The following analysis was published in the October 21 Profit Radar Report:

The SPDR S&P Homebuilders ETF (XHB) is one of the most hated ETFs right now. In September XHB languished in over-sold territory for 10 consecutive days without bounce. Daily RSI-35 (not shown) is the most over-sold since August 8, 2011. Trade is currently below two (red) long-term trend lines. Trend channel support is around 33.13.There are no bullish divergences. In summary, XHB is down 28.75% since January, and is over-sold enough to spark a powerful spike at any time. However, there are no bullish divergences indicative of a lasting low. Perhaps this will change by the time XHB reaches the black trend channel.”

October 28 Profit Radar Report:

XHB closed below the black trend channel on Friday, but with a bullish divergence. A move back inside the channel (above 32.90 on Monday) and above trend line resistance (33.25 and 33.70 on Monday) could unleash a strong bounce. Aggressive traders may buy accordingly.”

Since Monday’s low, XHB rallied as much as 7.95%. Based on sentiment and technicals, further gains are likely.

The Profit Radar Report monitors key indicators to spot low-risk or high probability opportunies. Click here to subscribe or learn about our approach.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

S&P 500: Short-term Update

This is a short-term S&P 500 update. A longer-term S&P 500 update is available here.

The October 21 Profit Radar Report warned that: “The chart constellation suggests the potential for a mini crash are elevated. The ideal (down side) target for wave c is 2,675 or 2,587. Waves c are called crash waves, so a couple of strong down days are quite possible.”

Starting on October 24, we expected the ending diagonal pattern (converging purple lines) to play out. Below are the S&P ending diagonal charts published in the October 24, 28 and 29 Profit Radar Reports.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The October 28 Profit Radar Report stated that: “The S&P continues to respect the diagonal boundaries, so we respect the diagonal pattern. On Friday trade briefly dropped below the lower boundary (small blue circle), as it usually does at the end of the pattern. Another drop into the 2,600 range (big blue oval) is still possible, and would actually be preferred for a potential short-term buy signal. A sustained move above diagonal resistance (2,705 on Monday morning) would be an initial indication that a low could be in.”

The S&P 500 should now be in its way towards the up side target discussed in the longer-term S&P 500 update last week. Although unexpected, a drop below last week’s low could unleash another crash.

Continued updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

S&P 500 Update: Risk vs Reward Reversal

Back in February, the Profit Radar Report published the two most likely S&P 500 forward projections (one of them shown below, the other one was very similar), and stated that: “Both scenarios will eventually lead to new all-time highs.”

My ideal up side target has been 3,000+/-, but risk increased once the minimum up side target (new highs) was reached.

Based on a number of bearish developments and divergences, the September 19 Profit Radar Report stated that: “Chasing price here comes with more risk than reward.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The September 30 Profit Radar Report tried to quantify the down side risk – based on the trend channel shown below – and stated: “A test of the lower trend channel (around 2,850) could be wave 4, followed by wave 5 towards or above 3,000.”

Obviously the S&P has already reached 2,850, and is now over-sold, and just above Fibonacci support around 2,830. Another area of support (based on Elliott Wave Theory for a diagonal) is the June 13 high at 2,791.

While in that range (2,850 – 2,780), the S&P can (and I think will) still find support for a year-end rally to 3,000+/-.

Of course there is a chance that the September high marks a more significant top with down side targets at 2,600 – 2,200.

We will likely reach those down side targets eventually, but a prior attempt to take out 3,000 would conform to seasonality, take out premature bears, and allow some of those bearish divergences to mature even further and set the stage for a bear market.

The months ahead should certainly be exciting!

Continued updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.