Will Momentum Continue to Push Stocks Higher?

From December 3 – December 26, 2018, the S&P 500 lost 453 points. Since then, the S&P rallied 400 points.

Who would have thought that the worst December since 1931 would be followed by the best January since 1987?

Extremes Everywhere

We are truly living in a world of extremes. The rich are getting richer, the poor are getting poorer while historic heat waves and polar vortexes ravage the globe. Stock market extremes fit into the picture.

Although the relentlessness of this rally was unexpected (at least for me), the Profit Radar Report highlighted a tell tale sign of the latest buying extreme when 90% of NYSE-traded stocks advanced on January 4 (blue columns).

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 the table and thumbnail charts below shows (originally published in the January 9 Profit Radar Report), this kind of breadth and momentum thrust is rare and almost always long-term bullish.

Confirmation?

The initial thrust is thus far confirmed by my favorite liquidity indicator (blue graph, first chart), which has already retraced 88.82% of its prior losses, significantly more than the 63% S&P 500 retracement.

A new high of the liquidity indicator prior to a S&P 500 high will be additional confirmation of further gains.

Momentum vs Over-bought

The S&P 500 ended Tuesday overbought (based on RSI-2 – bottom graph, first chart). This is not the first time the S&P has become over-bought, but in 2019 it’s been a ‘mind of matter’ pattern; As long as the market doesn’t mind, it doesn’t matter.

Red line resistance, the next potential speed bump, is around 2,745.

The Elliott Wave pattern for almost every major index is up to interpretation, but the Nasdaq-100 QQQ ETF pattern offers slightly more clarity than others.

As the chart above shows, QQQ could be completing a 5-wave move. Upon completion, a 5-wave move is followed by a correction (quite commonly a nasty one), and further gains.

One anomaly that also cautions against chasing stocks at this stage is the VIX. As the chart above shows, the VIX has fallen back to support around 15, in fact, it’s at the lowest level since October. At the same time, the S&P 500 is still below its 200-day SMA.

It’s unusual for the VIX to drop to a 3-4 month low while the S&P is still below its 200-day SMA. In fact, over the past 20 years it only happened during the 2001/02 and 2008 bear markets. Forward returns were consistently negative.

In summary, chasing stocks at this stage does not seem prudent. There should be a pullback … and who knows, perhaps the pullback also gathers momentum. We’ll evaluate when we get there.

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.

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Is the ‘Bear Market’ Already Over?

On December 24, 2018, the S&P 500 closed at 2,351.10. Much of the financial media pronounced a bear market that very day:

  • CNBC: We are Now in a Bear Market – December 24, 2018
  • Yahoo! Finance: S&P 500 Enters Bear Market: December 24, 2018
  • Investors Business Daily: S&P 500 Enters Bear Market – December 24, 2018
  • Motley Fool: Here’s Why the S&P 500 Plunged into a Bear Market – December 27, 2018

As the chart below shows, Google searches for ‘bear market’ also soared to an all-time high.

The entire bear market discussion is superfluous in my humble opinion. I explained why in the December 19 Profit Radar Report:

“‘Bull market’ and ‘bear market’ is a status like ‘online’ or ‘offline.’ Just because someone is offline today, doesn’t mean they can’t be online tomorrow. As any momentary snapshot status, the bull/bear market status is not predictive of future events.

In fact, statistically, most bear markets end after the S&P 500 declines 16%. The red graph below shows the average path of the past 10 bear markets (as defined by Ned Davis Research). The S&P has almost reached the maximum down side of the average bear market.”

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.

Below is an updated version of the chart published in the December 19, PRR.

Even though the S&P overshot to the down side, and now to the up side, it is following the average bear market trajectory … if one considers this a bear market.

Also note how the S&P bounced from support shown in the first chart.

Is this Bear Market Already Over?

Breadth thrust says: Yes.

On December 26, and January 4, 87% and 90% of NYSE-traded stocks advanced. Since 1985, there have been 5 other times when >85% of NYSE-traded stocks advanced within a 2-week period. Those 5 times are listed below. To the right of each date is a thumbnail chart, which shows how the S&P 500 performed over the next 6 month.

  • In 1987, and 2016 the S&P retested the initial panic low.
  • In 2009 and 2011, the S&P took off to the up side.
  • The 2008 thrust was followed by a rally, but ultimately failed.

Divergences say: No.

Divergences, bullish or bearish, are a helpful forecasting tool. Why?

Prior to a major market turn, market internals tend to divergence from price. If there is no divergence, the odds of a major turn are lower.

For example: At the January 2018 top, the S&P 500 and RSI-35 peaked on the same day. The January 31, 2018 Profit Radar Report stated that: “There was no RSI-35 divergence at Friday’s high. This very likely means that Friday’s high will eventually be exceeded.”

That’s what happened. But, there was a bearish divergence at the September 2018 high, which means new highs are no longer guaranteed.

More importantly, there was no bullish divergence at the December low. This doesn’t mean stocks can’t reach new highs, but due to the bearish divergence at the September 2018 top and the lack of bullish divergence at the December 2018 bottom, the odds of new all-time highs are reduced.

Conflict

Unfortunately there is a conflict between two pretty reliable indicators/studies. The breadth thrust suggests new highs, while divergences (or lack thereof) suggest new lows.

Tie-breaker

The S&P reached the black trend channel, which has been my up side target. The channel has acted as support/resistance numerous times over the past year, and may do so again. A re-test of previously broken support has ‘last kiss good bye’ potential.

Unfortunately that matter is complicated by the fact that the popular 50-day SMA (blue line) coincides with the hand-crafted trend channel. The market likes to see-saw popular SMAs to fool the masses.

The 2-hour chart provides some more details: Yesterday, the S&P 500 broke above the gray trend channel (blue circle). While above that trend channel, trade may continue higher (note the potenial triangle outlined by the purple lines, or diagonal outlined by the blue lines).

However, the larger black trend channel near 2,625 may end this rally leg (perhaps with some see-saw, courtesy of the 50-day SMA). A break back below the gray trend channel should usher in a 100+ point correction, possibly even a re-test or break of the December low.

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.

How to Predict a Market Crash

Although I warned of an environment where the risk of a meltdown is high (wave 3 down, based on Elliott Wave Theory), I can’t claim credit for predicting the December crash.

Because of my multi-indicator approach to market forecasting, and profound concern for my subscriber’s portfolio’s, I rarely ever make absolute one-directional predictions based on only one indicator.

Absolute Predictions

There are plenty of absolute and unequivocal predictions out there. Such ‘hit or miss’ or ‘all or nothing’ bets are great when they work out (and like gambling, sometimes they do), but cause excruciating pain when they don’t.

Below are a few examples of recent all or nothing predictions:

December 6: “The last great buying opportunity of the decade is here!”

December 10: “Keep cool! S&P 500 & Nasdaq holding above lows. Signal is bullish!”

December 19: “ All structural criteria is in place to create a POWERFUL 1-2 week rally”

My favorite: May 14, 2018 (and virtually every day since 2011): “I think it likely that the rally is ending today” (red arrows added to show implications of wave 2 top, and subsequent wave 3 decline)

I found in my research that the only folks who ‘predicted’ the December meltdown, are those we’ve been spewing doom and gloom for years (even a broken clock is right twice a day).

My Promise

My intent is not to discredit the above services, but to highlight the flaws of tunnel vision research. That is, research based on only one indicator or one methodology.

Before publishing the Profit Radar Report (many, many years ago), I lost a lot of money by trusting one single indicator (which at the time had a good track record). Back then, I took off my ‘research blinders,’ and vowed to expand my research horizon.

Better Diversification

Diversification is a popular term in the investment world, and it’s almost exclusively linked to asset allocation. But what about research diversification?

Just as a diversified portfolio smoothes out individual boom and bust cycles, research diversifcation eliminates the ‘hit or miss’ performance tied to any one single indicator.

Multi-indicator Approach

My goal is to distill and compress the message of various indicators (such as: investor sentiment, money flow, breadth, technical analysis, price patterns, seasonality, etc.) into the most likely path going forward, the direction suggested by the weight of evidence.

For example, on October 28, when the S&P 500 first fell into the 2,600s, I published the weight-of-evidence-based projection (yellow lines) along with the below commentary via the Profit Radar Report:

The biggest potential ‘fat pitch’ trades are to go short above 2,830 (red box) or buy at the second low (green box).”

The yellow lines projected a move from 2,600 to ~2,850, followed by a drop to ~2,400.

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.

Crash Environment Alert

Starting on December 9, I warned subscribers that a wave 3 crash is a possibility. For example, the December 9 Profit Radar Report stated that:

Based on Elliott Wave Theory, the S&P 500 could be 1) nearing the exhaustion point of this down leg, or 2) be in a strong and sustained wave 3 lower. Scenario #2 seems more likely.”

The December 17 Profit Radar Report reiterated the following:

Based on Elliott Wave Theory, both options discussed on December 9:

1) Washout decline with target of 2,550 – 2,500 (or 2,478 as per Sunday’s PRR)

2) Accelerating wave 3 lower (which could erase another 10% fairly quickly)
are still alive
.”

In case you are new to Ellliott Wave Theory (one of the many indicators of the multi-indicator approach), here is a description of a wave 3:

Wave 3 is the longest and most powerful of all Elliott Waves. Wave 3 continues to move higher (or lower) despite overbought (or oversold) momentum and sentiment readings. A common target for wave 3 is a Fibonacci 1.618 of wave 1 (which currently is 2,269 for the S&P 500).

Pros and Cons

One ‘drawback’ of the multi-indicator approach is that you will rarely hear a flashy ‘all or nothing’ call.

The benefit is that you will rarely be on the losing end of such a call. The multi-indicator approach does however, outline when the risk of a crash or the potential of a spike is elevated.

And perhaps most importantly, there are times when nearly all indicators point in the same direction to form a potent and very reliable buy/sell signal (such as in March 2009, October 2011, February 2016).

Based on what I’m seeing right now, it seems like we are nearing such a signal.

The latest S&P 500 forecast is available here: Short-term S&P 500 Update

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.

Short-term S&P 500 Update

2018 has been a year of extremes. The year started with stocks becoming extremely over-bought, and ended with stocks getting extremely over-sold.

In fact, 2018 hosted the worst December performance since 1931.

The December 23 Profit Radar Report stated that:

We are likely in an environment where pessimism can become even more extreme, but those extremes can cause violent 1 – 5 day spikes. In terms of seasonality, a Santa Clause Rally (last 5 days of 2018, and first 2 days of 2019), occurs 73.5% of the time (since 1970). The odds of a multi-day rally – within a longer down trend – are elevated.”

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.

Over the next two days, the S&P 500 dropped to 2,347 (the lowest level since May 2017), and thereafter jolted 5% higher, in a single day.

How does this rally (up to 174 points in 3 days) fit into the larger picture?

The DJIA already reached its ideal down side target (21,700, which is where wave 3 or c equals 1.618 x wave 1 or a).

The S&P 500 has not yet reached its ideal down side target (2,269, which is where wave 3 or c equals 1.618 x wave 1 or a). However, the S&P bounced from 2,349, where wave 3 or c equals 1.382 x wave 1 or a).

In other words, we are dealing with a measure of conflict:

  • The DJIA already reached it’s down side target, the S&P 500 did not.
  • Sentiment at the December 26 low was extremely compressed, which allows for a larger bounce.

How do we resolve the conflict?

The December 30 Profit Radar Report published the chart below, which illustrates the ideal outcome, along with the following commentary:

The S&P 500 has not reached the 161.8% Fibonacci projection level (2,269), which as a common down side target for waves 3. Unless the S&P closes above Friday’s high (2,520), we assume that we’ll see new lows.”

The above path is still in harmony with the outlook published in the October 28, 2018 Profit Radar Report, which projected (yellow lines, chart below) a rally from 2,600 to 2,850 (in October/November) followed by a drop to about 2,400 thereafter.

Obviously there has been much flux and volatility, and trading this market comes with a fair amount of risk.

But, where there’s risk, there is usually opportunity, and if the S&P follows our path, hits our down side target while over-sold and with bullish divergences, we will want to buy.

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 at ‘Make it or Break it’ Level

The S&P 500 has reached a seemingly important ‘make it or brake it’ zone. Here’s why:

For the last couple of weeks, I’ve been following two scenarios:

1) Washout decline with target of 2,500 – 2,500 (purple arrow, chart below)
2) Accelerating wave 3 lower (yellow arrow, chart below)

The two scenarios were first introduced via the December 9 Profit Radar Report, which stated that:

A brief drop below 2,618 (with next support at 2,607, 2,550 and perhaps as low as 2,500) followed by a quick recovery would preserve the bullish divergences and suggest sellers got ‘washed out’ and a year-end rally is underway. Persistent trade below 2,618 and 2,607 means we need to allow for more weakness.”

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.

Both scenario had the same outcome, mentioned in the December 12 Profit Radar Report: “We assume with a high degree of certainty that this rally will ultimately re-lapse to new lows. The question is not if but when.”

Although I amended the ideal down side target for scenario #1 to 2,478 (December 16 Profit Radar Report), the decline has gone a bit further than I initially thought.

Nevertheless, up until now, both scenarios pointed in the same direction. That’s no longer the case.

A (sustained) break below the blue trend channel and Fibonacci support (both around 2,478) will tilt the odds significantly towards scenario #2, which could see the S&P drop another 100 – 300 points.

Assessing the Odds

Based on Elliott Wave Theory, the odds are 50/50.

Statistically, the odds of a breakdown are less than 15%. How so?

The red graph below shows the average path of the past 10 bear markets (as defined by Ned Davis Research). On average, the S&P does not fall more than 16% during the average bear market (this average includes the 2000 and 2008 bear markets).

Today’s performance was unique and remarkable in many ways:

  • S&P 500 closed down 1.54%, but VIX was unchanged
    Since 1992, VIX was unchanged or lower when the S&P was down more than 1% only 32 other times. Over the next month, the S&P rose 81% of the time, on average 2.4%
  • S&P 500 turned a >1.5% gain into a >1.5% loss
    Since 1982, the S&P turned a >1.5% gain into a >1.5% loss 7 other times. 1 week, and 1 month later it was up 86% of the time.
  • S&P 500 lost > 1.5% on an FOMC day
    Since 1996, the S&P lost >1.5% on a FOMC day 5 other times. 1 week later, it was up 60% of the time, 1 month later it was up 80% of the time (datasource: SentimenTrader).

Summary

The S&P 500 just suffered the worst start to a December since 1931. Although statistical odds favor a bounce from here, Elliott Wave Theory cautions that a break below 2,478 can unleash another wave of selling.

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: Does Low Fear Portend High Risk?

Below is a free excerpt of the December 9, Profit Radar Report, which takes a detailed look at various sentiment, liquidity, breadth and moment indicators to gauge the down side risk. Since this update is published out of context with all the other updates, an additional “Summary” section is provided at the end of the December 9 Profit Radar Report to provide bigger picture context.

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.

                                       * * * * * December 9, 2018 Profit Radar Report * * * * *

The S&P 500 closed at 2,633.08 on Friday. That’s only 1.99 points higher than the November 23 low. If the S&P would have closed at a new low, it would have been interesting to see if there are any bullish divergences.

Well, futures are down 20+ points in Sunday’s trading, so let’s just pretend the S&P closed at new lows, and look for potential divergences anyway. The blue box highlights the price action since the September high.

  • RSI-35 did not confirm the ‘new low’ (RSI-2 is near over-sold)
  • The cumulative NY Composite a/d lines did not confirm
  • The NY Composite a/d ratio did not confirm
  • The percentage of stocks below their 50-day SMA did not confirm

How about different sentiment gauges?

  • The VIX is below its October extreme
  • The VIX/VIX3M ratio is below its October extreme
  • The CBOE equity put/call ratio is at the same level
  • Contango is above its October extreme
  • The SKEW carved out a new low
  • The CBOE equity put/call ratio (5-day SMA) is below its November extreme
  • NAAIM equity exposure is about even, but above its November extreme
  • Bullish Advisors polled by II are less bearish than last week
  • Bullish Investors polled by AAII are less bearish than last week

All the above indicators show that there is little panic, certainly less panic than in October or November. This could be viewed as either 1) a bullish divergence or 2) there is enough room for the market to fall further.

Based on Elliott Wave Theory, the S&P 500 could be 1) nearing the exhaustion point of this down leg, or 2) be in a strong and sustained wave 3 lower (S&P could still rally towards or into 2,700s before next down move). The summary section below discusses which scenario is more likely.

Another attention grabber was last week’s ‘death cross,’ where the 50-day SMA fell below the 200-day SMA.

The last time death cross that received a lot of attention was in May 2016, when the 50-week SMA fell below the 100-week SMA. This was supposed to be an ‘irrefutable sell signal,’ but ultimately turned out to be one of the best buying opportunities ever.

At best, SMA crossovers have a spotty track record, and we don’t base our anlysis on such lagging indicators. For those interested, the arrows in the weekly chart below mark all bearish and bullish 200/50-day SMA crosses over the past 20 years (weekly chart shown to capture longer-term history of signals).

Shown below are various support levels that may help navigate the coming weeks, and answer the question posed above: What’ next? Sustained move lower, or quick wash out decline followed by snap-back rally?

  • 2,618: Black trend channel
  • 2,607: Wave C = 61.8% wave A
  • 2,550: Wave C = 78.6% wave A
  • 2,500: Fibonacci support going back to 2011
  • 2,478: Wave C = 100% wave A
  • 2,385: Trend line support going back to 1998
  • 2,280: Trend channel support going back to 2009

The Russell 2000 IWM is in the general green support range, with trend channel support at 143.25 and 141.30. A bounce from 143.25 – 141.30 seems likely, but sustained trade below the lower trend channel would unlock lower targets.

The Nasdaq-100 QQQ has a general range of support at 161 – 157. A break below, would likely lead to a retest of the February/March lows at 154-150.

Summary: The above analysis was based on Friday’s closing price. The S&P 500 futures chart below includes Sunday’s 20+ point drop. Trade is right around black trend channel support. Anytime prices reaches support, odds of a bounce increase.

Based on the Elliott Wave Theory structure, we are trying to figure out whether we are nearing the end of this down leg (with a potential wash out decline), or if trade will accelerate lower (as a wave 3 would).

A brief drop (1-3 days) below 2,618 (with next support at 2,607, 2,550 and perhaps as low as 2,500) followed by a quick recovery would preserve the bullish divergences and suggest sellers got ‘washed out’ and a year-end rally is underway.

Persistent trade below 2,618 and 2,607 means we need to allow for more weakness.

We will take a stab at going long (only with a small amount as this correction may carve out lower lows eventually) if the S&P 500 drops below 2,607 and subsequently rallies above 2,620 (stop-loss to be set at that day’s low). The SPY buy level is thus linked to the S&P 500 (approximate corresponding SPY levels: buy on drop below 261 followed by move above 262.10 with stop-loss at day’s low).

The very first graph of today’s update (S&P 500 in 2011 – blue box) illustrates what a wash out decline may look like.

                                        * * * * * December 9, 2018 Profit Radar Report * * * * *

SUMMARY: The lack of fear, expressed by various ‘bullish divergences,’ is likely to result in a short-term bounce. Back in September, we expected a correction toward 2,400, and that seems still likely (longer-ter S&P 500 outlook available here). A drop toward 2,400 (or at least below 2,500), would probably trigger the kind of ‘panic readings’ commensurate with a more significant bottom.

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.

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.

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