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

Fed Acknowledges “Recession Risks”. Run for the Hills!

Forecasts / Financial Markets 2019 Mar 22, 2019 - 06:12 AM GMT

By: Troy_Bombardia

Forecasts

Today’s biggest news was that the Fed predicts no more rate hikes this year. Given that we are extremely late in this economic expansion cycle, this probably means that the Fed is also done hiking rates for this economic expansion cycle.

Of course, the news outlets and social media took this as “the Fed now acknowledges ‘recession risks’, so it’s time to run for the hills!”


Go here to understand our fundamentals-driven long term outlook.

Let’s determine the stock market’s most probable medium term 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.

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

Recession Fears

Here’s how the media and social media typically react to the Fed.

  1. The Fed hikes rates. Bearish! (How could stocks possibly go up when the Fed is hiking rates?)
  2. The Fed pauses rate hikes. Bearish! (The Fed acknowledges recession risks.)
  3. The Fed cuts rates. Bearish! (The economy is definitely in a recession.)

The second point is somewhat valid. When the Fed stops hiking rates for the last time in each economic expansion cycle, you are typically 0.5-1.5 years before a recession begins.

Here’s the last rate hike of the previous 3 economic expansions.

  1. February 1989
  2. May 2000
  3. June 2006

Here’s what the S&P 500 did next.

Is this late cycle? Yes

Is this immediately and menacingly bearish? Not consistently.

Yield curve

With the Fed no longer hiking rates, long term interest rates cratered today. Here’s the 10 year – 3 month yield curve.

Here’s what happens next to the S&P when the 10 year – 3 month yield curve inverts.

Will the yield curve invert?

Some readers are probably wondering “with the Fed no longer raising short term interest rates, will the yield curve invert”?

*I find the 10 year – 3 month section of the yield curve to be more predictive than other parts of the yield curve.

The 10 year yield made a new 1 year low today for the first time in 1 year.

Historically, this is a bearish sign for the 10 year yield. Yes, it does seem that the 10 year yield will keep drifting lower as the rest of the yield curve inverts.

An interesting look at the entire yield curve

Otavio Costa presented an interesting chart on Bloomberg recently, which demonstrates what % of the yield curve is inverted.

On the surface, this looks scary. HOLY SHIT THIS HAPPENED BEFORE 2000 AND 2007

I am generally wary of charts that limit themselves post-1999. Doing so usually hides false SELL signals pre-1999. As objective traders, we need to look at all the data: those that confirm our view and those that go against our view.

So I took the data from StockCharts and created a similar chart.

The following chart (from 1990 – present because that’s all the data that’s available) looks at what % of the yield curve is perfectly inverted. I used the following Treasury yields:

3 months, 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 20 years, 30 years

As you can see, this also happened in 1998, 1.5 years before the bull market topped.

By removing the 7 year Treasury yield and 20 year Treasury yield, I was able to push the chart back to 1982.

So just how scary is this?

Here’s what happens next to the S&P when at least 37.5% of the yield curve becomes inverted (first case in 1 year)

Late cycle? Yes

Immediately bearish for stocks? Not so much. Know your risk:reward.

Banks

Bank stocks tanked on today’s Fed news. As a result, the S&P 500 has made a “divergence” from various bank indices such as the KRX Regional Bank Index.

How bearish is this “divergence”?

Here’s what happens next to the S&P when the KRX Regional Bank Index falls more than -8% over the past month, while the S&P rises more than 1%.

Yes, this did happen before 2007. But it also happened in other less bearish cases.

USD

To be popular in the finance community, you generally need to be bullish on gold, bearish on stocks, predict a recession, and hate the fiat USD paper $$$.

And believe me, living in Australia I would love to be bearish on the USD. I keep 2 years worth of living expenses as a cash reserve (in AUD), and the USD value of this cash reserve is getting killed by the strong USD.

But the data suggests otherwise.

Currency markets have experienced low volatility for quite a long time. As a result, the USD Index’s 10 monthly standard deviation is now less than 1% of its value.

Here’s what happens next to the USD Index when its 10 month standard deviation is less than 1% of its value.

Is a rising USD bearish for stocks?

MACD histogram

A prominent permabear presented the following chart recently.

As you can see, NDX’s weekly MACD histogram is as high as it was in the dot-com bubble. HOLY SHIT IT’S THE DOT-COM BUBBLE ALL OVER AGAIN.

Is it?

The MACD Histogram is a nominal value. It’s not a relative % value. Since NDX today is almost double of where it was in 1999, such a high MACD reading is not equivalent to the same MACD reading in 1999.

Comparing today to the dot-com bubble is similar to another trick used by the permabears. “The Dow fell -400 points today. The Dow fell -400 points in 2008. HOLY SHIT IT’S 2008 ALL OVER AGAIN”! (Never mind that the Dow is 4x higher today than where it was in 2008. But don’t let the simple truth get in the way of a good story).

Here’s NDX’s MACD Histogram adjusted as a % of the NDX’s value. Just like the dot-com bubble indeed.

Click here for yesterday’s market analysis

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) is more bullish than bearish.
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retest. Focus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading models.

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 2019 © 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