How Stocks Escaped from 3 ‘Unavoidable’ Bear Markets

This bull market has been counted out many times. Just over the past few years, stocks faced three – allegedly – unavoidable bear markets … and escaped all of them.

Here are the three ‘unavoidable’ bear markets, and why stocks escaped:

Unavoidable Rate Hike Bear Market

Starting in 2015, the Federal Reserve let it be known that interest rates will be rising.

According to the pros, rising rates would sink stocks. After all, that’s why the Fed kept them near zero for so long.

However, history simply doesn’t agree with this conclusion. The April 26, 2015 Profit Radar Report used the chart below to illustrated that rising rates are not bearish.

In fact, 9 of the 13 periods of falling rates (since 1954) saw stocks rally. That’s why the Profit Radar Report concluded that: “A rate hike disclosed at the April, June, July or even September or October FOMC meetings is unlikely to coincide with a major S&P 500 top.”

Barron’s rates iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Unavoidable Oil Slump Bear Market

Falling oil prices were the hot topic as prices dropped 50% from June – December 2014.

The general opinion was that falling oil prices would send stocks lower, like in 2008.

The December 14, 2014 Profit Radar Report ousted this bogus reasoning with the chart and commentary below:

This year’s oil price collapse differs from the 2008 collapse relative to the S&P 500. In 2008, the S&P 500 topped before oil did. In fact, the S&P 500 recorded its all-time high in October 2007 and was already down 21% by the time oil topped on July 11, 2008. In 2014, the S&P 500 recorded new all-time highs five months after oil started to decline.

The chart below plots oil against the S&P 500 and shows that falling oil prices are not consistently bearish for stocks. If history can be used as a guide, stocks are likely to hold up despite the oil meltdown.”

Unavoidable QE Bear Market

In 2008, the Federal Reserve unleashed it’s first round of Quantitative Easing (QE). A couple trillion dollars later, QE came to an end in October 2014.

Investors feared the withdrawal of QE would sink stocks (just like a junkie will crash without new fix).

The simplified logic (QE started this bull market, the end of QE will finish the bull market) seemed logical, but it wasn’t factual.

The October 5, 2015 Profit Radar Report plotted the QE money flow against the S&P 500 and concluded that: “We expect new bull market highs in 2015.”

Why?

The correlation between QE and stocks (at least in 2013/2014) did not support the notion of a bull market end. More importantly, our major market top indicator said the bull market is not over.

2016 Bear Market?

At the beginning of the year, when the S&P traded near 1,900, the media found countless of reasons why the bear market is finally here (many of them are listed here).

About six months and a 15% rally later, it’s obvious that the bull market is alive and well.

Short-term, the S&P has reached the lower end of our up side target range, so a pullback becomes more likely (more details here). However, any pullback should serve as a buying opportunity.

If you are looking for common sense, out-of-the-box analysis, check out the Profit Radar Report. It may just make you the best-informed investor you know.

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, and 24.52% in 2015.

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

History Says: Rising Interest Rates Rarely Sink Stocks

The news-reporting powers to be have determined that rising interest rates are the bull market’s worst enemy.

In fact, the looming threat of rising rates is as unwelcome as the dreaded QE taper used to be. But wait, QE ended many months ago, and stocks are still near their all-time high (see here for detailed analysis of QE effect on stocks).

Could rising interest rates be a moot point (just like the end of QE was)? As we will see in a moment, rising rates are not as scary as many believe.

But first off, how does the Federal Reserve raise interest rates and which interest rate is the one being ‘manipulated’?

What’s the ‘Interest Rate’?

When the Federal Reserve (or the media) talks about raising (or lowering) interest rates, it is talking about the federal funds rate.

The federal funds rate is the central interest rate in the U.S. financial system. It is the interest rate at which depository institutions trade balances held at the Federal Reserve with each other overnight.

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How Does the Fed ‘Manipulate’ the Interest Rate?

The Federal Reserve sets the target rate. The target rate is currently 0 – 0.25%. The Fed ‘manipulates’ this rate via government bond purchases (i.e. the Federal Reserve reduces liquidity and raises the federal funds rate by selling government bonds).

The actual rate is determined by trading between banks. The weighted average of bank transactions is considered the effective federal funds rate (currently 0.11%).

What Really Matters: How Do Interest Rates Affect Stocks

But what really matters is how the federal funds rate affects stocks.

Here’s what the data says:

The chart below plots the S&P 500 (NYSEArca: SPY) against the federal funds rate going back to 1954.

Periods of rising interest rates are highlighted in green.

More often than not, the S&P 500 moved higher (or didn’t decline significantly) when interest rates rose. The few exceptions are marked with a red box.

Most recently, the S&P 500 rallied when rates were buoyed starting in 2004 and 1998.

The green areas clearly show that rising rates are not bearish for stocks.

However, it needs to be pointed out that when the stock market rolled over in 2000 and 2007, the Federal Reserve had a lot of room to lower rates and stimulate growth.

That is not the case today. If this economic recovery does not stick, and stocks fall, the Federal Reserve won’t have much room to lower rates. It would take several rate hikes to build up a ‘cushion,’ that would allow the Fed to lower rates if the economy relapses.

Perhaps that’s why the Federal Reserve has been so hesitant to raise rates, and thereby spook the market.

Rather than focusing on rate hikes, I will continue to monitor the indicator that correctly foreshadowed the 1987, 2000 and 2007 market tops. It also ‘told’ us consistently since 2010 that this bull market is alive and healthy. Here’s what this indicator, which I dubbed ‘secret sauce’ is telling us right now. Is the S&P 500 Carving Out a Major Market Top?

Simon Maierhofer is the publisher 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 and 17.59% in 2014.

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

 

Yield Spread Between Junk Bonds and Treasury Bonds Hits Alarming Level

“If it seems too good to be true, it probably is” used to apply to investing. Although this piece of common sense folk wisdom has been eroding due to the Federal Reserve’s money policy, there’s reason to believe that junk bonds are in for at least a wake up call.

The Federal Reserve is watering (or drowning) growth investors and dehydrating income investors. The slim pickings interest rate environment is forcing investors into high yield/high risk vehicles, such as high yield or junk bonds.

High yield bond issuance saw a record high of $346 billion in 2012. In the first quarter of 2013, investors already gobbled up an additional $90.4 billion. Due to unprecedented demand, junk bond yields hit a record low 6.11% in January 2013.

Based on the BofA Merrill Lynch US High Yield Master II Option-adjusted Spread, junk bonds now yield only 4.79% more than US Treasury bonds.

Perhaps with a guilty conscience, the Fed has provided the liquidity needed to neutralize the usually associated with high yield (or more truthfully called junk) bonds.

Nevertheless, as the chart below illustrates, the spread below Treasury bond and junk bond yields is approaching a range that’s been troublesome for stocks.

The chart plots the S&P 500 against the inverted (to better illustrate the correlation) BofA Merrill Lynch US High Yield Master II Option-adjusted Spread.

The red dotted lines highlight the correlation between yield spread lows and market highs. The solid red line stands for yield resistance, the solid green line for yield support.

The current constellation means that risk for stocks is rising. In itself that doesn’t mean that we’ll be confronted with a major market top like 2007, but it increases the odds for a stock market pullback.

Since junk bonds perform similar to stocks, it may be appropriate to scale back or sell junk bond ETFs like the SPDR Barclays High Yield Bond ETF (JNK), or iShares iBoxx High Yield Corporate Bond ETF (HYG). JNK and HYG have both fallen below trend line support, emphasizing the bearish yield spread message.

Treasury ETFs, including the iShares Barclays 20+ year Treasury Bond ETF (TLT) should benefit from a decline in junk bond prices.

In fact, the Profit Radar Report issued a buy signal on long-term Treasuries on March 18, when TLT was still trading at 116.

How The Federal Reserve Gives Insider Trading Tips to Big Banks

Investors have no clue what goes on behind closed doors at Wall Street banks and the Federal Reserve. But once and a while a juicy piece of information (probably overlooked by censors) provides a glimpse of Wall Street’s carefully guarded secrets.

The New York/Washington Banksters do a good job of keeping internals hidden, but once in a while a juicy nugget escapes. Those kinds of nuggets make investors lose faith in everything Wall Street, that’s why Banksters like to keep them secret to begin with.

Insider Tips from the Federal Reserve?

On August 17, 2007, the Federal Reserve cut the discount rate from 6.25% to 5.75%. The Fed is quite careful about changing the discount rate, and when it does it’s usually only tweaked by 0.25%. The 0.5% cut on August 17 was ‘unexpectedly’ drastic.

The Fed regularly releases transcripts of its policy meetings with a 5-year lag. Courtesy of such a release we are now getting a glimpse of what happened leading up to the August 17, 2007 meeting.

In an August 16 video conference call, Timothy Geithner (back then president of the New York Fed) said banks “obviously don’t have any idea that we’re contemplating a change in policy.”

Jeffrey Lacker, head of the Richmond Fed, questioned Geithner’s statement and asked: “Did you say that they are unaware of what we’re considering or what we might be doing with the discount rate?”

What reason did Lacker have to question Geithner? The transcript continues: “I (Lacker) spoke with Ken Lewis, president and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility.”

In a statement provided to Reuters last Friday, Lacker reiterates: “From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market.  My understanding was that (New York Fed) President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives.”

What’s the Difference?

What difference does this make you may wonder. The chart below provides a nice visual. The Fed hasn’t had a chance to lower rates in years, but right before the financial crisis interest rate announcements sparked anticipation like nothing else.

At 2pm on August 16 (a day before the official announcement), stocks started to soar for no apparent reason. The S&P 500 jumped 45 points within a matter of hours and recorded its best gain in 4 ½ years.

Financial ETFs like the Financial Select Sector SPDR ETF (XLF) soared as much as 16.95% that day.

The SPDR S&P Bank ETF (KBE) gained as much as 7.26% that day.

Over the next few weeks, the S&P 500 continued to rally more than 200-points. It went as high as 1,576.09. The rest is history with still much mystery.

Although with a more than 5-year time-lag, we now find out that the Federal Reserve kindly gave the big banks a friendly heads up.

The Treasury declined to make Geithner available to comment. Spokesmen for the Federal Reserve Board in Washington, the New York Fed, Bank of America, and Ken Lewis all declined to comment.