Much anguish over the yield curve inversion
There is much chatter in the MSM and elsewhere about the newly-emerging yield curve inversion. Just like the Brexit issue, pundits are deeply divided over what this means for stocks and the economy. For instance, here is one author who believes it can be ignored and says stocks can continue their merry way northwards.
And here is another who points out that in some previous inversions, stocks managed large gains for at least a year after the inversion.
And some pundits express puzzlement why an inversion should flag economic weakness ahead anyway. I covered that point last time by pointing out that a higher short term yield encourages asset selling and cash parking, while a lower (but positive) long term bond yield encourages switching into bonds from equities. We are seeing such panic bond buying in Treasuries currently.
With this kind of pressure on equities – after a stunning post-Christmas rally – and because the news follows the markets, I expect to see further weak economic numbers as the news will follow the market lower.
But most pundits who are fixated on the recession question are looking in the wrong place to forecast where stock prices are heading. Yes, the gloom-and-doom merchants are out on force and nothing sells newspapers better than that!
But under the bonnet/hood, sentiment remains max bullish with DSI running well over 90% among the investment pros. Talk about groupthink! They have bought into the theme that the Fed would never let stock prices collapse. They recount all the previous times the Fed has stepped in with easing at the slightest whiff of a major correction.
But with the current Fed attitude of ‘accommodation’, will history repeat and lead to a bull continuation? After all, the economic data shows a definite global slow-down. So there is a titanic battle raging between the ‘bullish’ interest rate picture and the ‘bearish’ data.
And that is translating into huge short-term volatility in the share indexes. This shows up in the Dow. Since Christmas, most of the rise was a one-way street with only a few small corrections:
But since the high earlier this month, the waves have been much larger and more frequent as the great tug-of-war intensified. This is what happens after a very long trend enters a termination phase. Opinions become hardened.
So what is a fundamentals guy investor to think with such a stark divergence of ‘expert’ opinion? Will the yield curve inversion or even Brexit be good, bad or indifferent to share values?
If you do not have a solid technical trading system, you would be left scratching your head I’m quite sure. But with such a system, does that help you to divine upcoming trends and trend changes with a lot more confidence?
This morning, I advised VIP Traders Club members on a short trade in the Nasdaq – and here is why (using my tried and true Tramline Trading system);
This is the daily showing the decline off the ATH of last August. The post-Christmas rally was already a very deep upward retracement of the entire decline and my mid-month, many believed it was heading up into new ATHs. If this was a true second wave, it had better top out soon!
But I was watching the short term patterns carefully and this morning, I found a great low-risk short trade that confirmed the wave C oif 2 was very likely in at last Friday’s high.
Here is the killer short term 1-hr chart I posted this morning:
Overnight, the market had rallied to the Fibonacci 62% resistance and kissed the lower blue tramline – double strong resistance. and after that hit, the market started a scalded cat bounce lower and was getting teed up for a low risk short trade.
And this is the current picture
In fact, I caught the top of the morning rally and the sharp decline has all the hallmarks of an impulsive third wave down. I am looking for it to move much lower.
But one note of caution: I have noted that much of the MSM pundits are very bearish, and that is making me nervous. We shall probably see a continuation of wide-swinging markets as it works lower.