Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Massive Stock Market Price Reversion May Be Days or Weeks Away - 22nd Sep 19
How Russia Seized Control of the Uranium Market - 22nd Sep 19
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Crashed While the Yield Curve Inverted

Stock-Markets / Stock Markets 2018 Dec 05, 2018 - 05:08 PM GMT

By: Troy_Bombardia

Stock-Markets

The stock market tanked -3% today as the yield curve started to invert.


Let’s determine the stock market’s most probable direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are walking into the future blindly.

Yield curve inversion

I have talked about the yield curve inversion several times over the past 2 weeks. And as expected, financial media is screaming “YIELD CURVE INVERSION!!!! RUN FOR THE HILLS!!!”

Let’s look at the data.

The 5 year – 3 year yield curve is the first yield curve to invert.

Here’s what the S&P 500 did next after the first inversion in each economic expansion.

The next yield curve to invert will be the 5 year – 2 year yield curve. This will probably invert within the next few weeks.

Here’s what the S&P 500 did next after the first inversion in each economic expansion.

After that, the 10 year – 2 year yield curve will probably invert.

Here’s what the S&P 500 did next after the first inversion in each economic expansion.

After that, the 10 year – 3 year yield curve will probably invert.

Here’s what the S&P 500 did next after the first inversion in each economic expansion.

The last yield curve to invert will be the 10 year – 3 month yield curve. This is not likely to happen over the next few months.

Here’s what the S&P 500 did next after the first inversion in each economic expansion.

So what do you see?

The yield curve slowly inverts, one part at a time. This process has begun. The most timely yield curve is the 10 year – 3 months yield curve, and this is still a few months away from being inverted. The stock market is not consistently long term bearish until the last yield curve (10 years – 3 months) inverts.

This is why you should be careful when reading stuff from mainstream financial media. They love bearish headlines, because bearish headlines get 5x the number of clicks vs. bullish headlines. It’s good for their business.

Here’s the data to prove it.

Type in “bear market” into Google. Then type in “bull market” into Google. Bearish articles are 2x as popular as bullish articles, even though the stock market goes up >50% of the time. So in other words, the media (including social media) leans bearish, whereas in reality the stock market goes up more often than it goes down. Bad news sells.

A lot of big “down days”

If it seems like the S&P has been crashing on a lot of days recently, it’s because it has. There have been 3 days in the past 2 months in which the S&P fell more than -3%.

This is rare, especially with the S&P so close to an all-time high. (Most big -3% days occur after the stock market has already crashed 30-40%).

Here’s what happened next to the S&P 500 when it falls more than -3% on 3 days in the past 2 months, while within 10% of a 2 year high.

*Data from 1929 – present

As you can see, the sample size is very small. n = 2

Let’s relax the parameters

Here’s what happened next to the S&P 500 when it falls more than -3% on at least 2 days in the past 2 months, while within 10% of a 2 year high.

You can see a clear pattern. The stock market does well 2-6 months later, after which forward returns start to deteriorate (especially 1.5 years later).

Where’s the Santa Claus Rally?

The stock market fell more than -3% in 1 day. This is uncommon in December because a lot of investors and traders are looking for the “Santa Claus Rally”.

Here’s every single -3% decline in a December from 1927 – present, and what the stock market did next

Remarkably, the stock market was up 90% of the time 1 month later. So perhaps the Santa Claus Rally will appear after all?

*I don’t pay that much attention to seasonality. Seasonality factors are of secondary importance.

VIX is subdued

VIX was quite interesting today. The S&P fell more than -3%, yet VIX went up less than 30%.

  1. This is common AFTER the stock market has already crashed 30-40%. As VIX gets higher and higher, its % movement gets smaller (there’s an upper ceiling on “fear”)
  2. This is uncommon when the stock market is still close to an all-time high. Usually when the stock market crashes -3% while so close to an all-time high, VIX can spike 30-50% in 1 day.

Here’s what happened next to the S&P 500 when the S&P fell more than -3%, VIX went up less than +30%, while the S&P was within 10% of a 1 year high.

*Data from 1991 – present

As you can see, the stock market does well 6-9 months later, after which forward returns deteriorate.

XLU

One of the things that worries me is XLU’s performance during this correction. XLU = utilities, a defensive sector.

XLU actually went up today while the stock market fell more than -3%. This is uncommon. It represents the market’s rotation to defensive sectors.

Here’s what happened next to the S&P 500 when XLU went up, while the S&P fell more than -3% that day.

*Data from 1998 – present

As you can see, the most bullish returns occur 2-3 months later, after which performance starts to deteriorate.

n = 3, so take this study with a grain of salt.

Why you want to ignore the short term

Now, more than ever, it is important to ignore the short term. This is something that Stan Druckenmiller mentioned in September: the market’s short term price action is changing thanks to algos. This results in a lot of whipsaw for short term traders, whereas medium term and long term traders can avoid this. (Algos impact the market’s short term, but have little impact on the medium term or long term simply because algos only hold their positions for short periods of time).

The stock market either doesn’t move (very low volatility), or it moves like crazy (high volatility) nowadays. There is no inbetween anymore. That’s what algos do. For more information, I suggest you read the Bloomberg article here.

Click here to see yesterday’s market study

Conclusion

Our discretionary technical outlook remains the same:

  1. The current bull market will peak sometime in Q2 2019. Then a bear market will ensue. We are in a long term topping process. Tops are a process marked by large UP and DOWN swings, not an event.
  2. The medium term remains bullish (i.e. approximately next half year).
  3. The short-medium term is mostly a 50-50 bet.

We focus on the medium term and long term. We mostly ignore the short term, which is usually just noise.

Our discretionary market outlook is not a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.

Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

Click here for more market studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules