The yield curve continues to flatten which has caused more than half of all money managers to feel that 2018 will be the peak of this 9 year bull market run. Is there something to the flattening of the yield curve, or is this time different?
A news article came out today on CNN that you guys need to read. This is one of those articles that comes out and it’s going to be talked about, but then you’re going to forget that you read about it in a couple weeks or couple months untill the market does something really bad and drops a lot and then you’ll go back and say oh yeah, I remember this article on CNN.
Most investors think 2018 is the peak year for stocks.
The nine-year bull market might be on its last legs. 58% of global money managers surveyed by Bank of America Merrill Lynch think the stock market has already peaked or will later this year.
It is institutional traders and these money managers that drive the bull, bear, cycles. So if more than half of them, if more than half of global money managers, feel that the stock market has already peaked or will peak this year, you need to pay attention to that.
Now part of what’s causing the angst is the dynamic yield curve.
Jim Cramer came out on CNBC today and said that people that are worried about the yield curve flattening, well this time it’s different because blah blah blah blah blah. Jim Cramer said people need to stop being so melodramatic about the yield curve because this time it’s different, blah blah blah blah blah, and his reasoning. Folks, that is one of the biggest trading mistakes you can make is the belief that this time it’s different.
What you’re looking at right now is my favorite chart tool on stockcharts.com, the dynamic yield curve tool. Come over here and you can see that in 1999, right, we’re at this normal yield curve and as we get up to the top look at what happened. See how it bends and then it, when it snaps, it snaps hard and it snaps fast, right there. Hi-yah! Okay, that’s like a karate chop, whachaw,okay just whabush! Snap! And it goes inverted and look at what happens to the market. Okay, this was the 2000 peak and then boom! The market crash.
So then, as it’s falling boom, okay, the Fed reverses course, starts lowering rates, the short-end of the yield curve drops back down, we go into a normal yield curve and eventually the process starts again.
Stock market takes off, things get really hot, they start hiking rates again in 2005, their hiking the short-term rates and then this was interesting because we had an inverted, flat, and an inverted signal back in 2006 and it was somewhat early and that’s the only thing you have to watch out for about trading with the yield curve and looking at a flat or inverted curve as a signal for a coming bear market. Typically, it’s going to be a few months, but it can be a lot longer as we saw back in 2006 and 2007 and, and the market top. I would say it could be up to 12 months.
So here we go. Once again we get this flat and inverted yield curve. It started signaling way back 2006, boom, see? And once it goes it’s just whacush, and look at what happened after going flat and inverted the market crashes, Fed starts drastically lowering those rates, that’s 2007 high and then the market crash, and they start lowering rates back down, and the curve goes back into normal again, we start the process over again.
Okay, so now look at where we’re currently at. So you come up and you could see that it’s considerably, okay look at that folks. That’s a considerable flattening of the yield curve and it’s almost like that short end is waiting to go hi-yah, like a karate kick, and then snap up and when that happens, boom the yield curve will go inverted.
You can see from the dark shadows that show you where it’s been, the long side of the yield curve, 20 and 30 year, has the black line on top a little bit thicker than the black line on the bottom, meaning that those rates are coming down while clearly on the short end, on the three-month, two-year, five year, seven year, and 10 year, you can see that the black area is more on the lower side meaning that those rates are rising. And so were still in a normal yield curve, but this is the flattest that it’s been since all the way back in 2006 and 2007, before the last market crash.
I’ve just showed you why Jim Cramer was absolutely wrong for saying that, and that, on this chart, just going back to 1999, every single major move down, every single bear market, every single one was preceded by a flat to inverted yield curve, but it gets even better. If you, if this chart had more data, you would find that every single bull bear cycle that’s ever taken place was preceded by a flat or inverted yield curve, every single one. So there’s a big fallacy in saying, oh well this time it’s different. Oh yeah, everybody wants to say that. Everybody wants to feel that this time it’s going to be different because they don’t like knowing about a bear market coming. They don’t want to think about a flat or inverted yield curve. Jim Cramer wants to keep making money, wants to keep having CEOs come on his show that he interviews, wants to keep pitching out stocks as good buys, he just wants to keep the game going. He’s got a big vested interest in keeping the game going. So he doesn’t want a bear market to come. So he’s sticking his head in the sand, giving all these reasons why this time it’s different. I even heard some guy on CNBC said, saying, don’t worry about the flattening of the yield curve because it just, really with the yield curve is showing is a demand for money and since the demand for money has gone down, that is the demand for the US dollar has gone down, that’s what’s making the yield curve flat. I’m just like listening to these guys going blah blah blah blah blah. I would rather take the empirical data over their subjective cheer-leading any day of the week so don’t buy into it folks. When the yield curve goes flat or inverted, that’s our major signal that a bear market is coming.
You’re going to hear all these mainstream media and news outlets telling you why this time it’s different. Why the yield curve is naturally just gonna be more flat and inverted and how it’s not going to signal a bear market coming this time, and on and on. All, you know, that it’s the demand of the US dollar that’s making it flatter, it’s this, it’s that, it’s the Chinese selling their bonds just for now, and then eventually you know, blah blah blah blah blah. It doesn’t matter. All that matters is the incredible predictive track record of the yield curve and when it goes flat or inverted, a bear market’s coming anywhere within a few months, you know 2 to 3 months, to as long as a year.
So this flattening of the yield curve did hit markets. When you look at the Dow, the NASDAQ, and the S&P 500, you can see that it has kinda chopped out back and forth sideways, you know very difficult day to try to trade because it’s swinging back and forth, back and forth, and some are thinking oh, you know, that’s like a topping pattern, you know, because it can’t go any higher. I don’t know if that’s true.
What I would rather do is that when you see this kind of pattern you say alright, so is there any kind of inherent weakness within the market? And to know that, my favorite tool as premium members know, is the dark pool, monitoring the big block trades coming off of the dark pools and this is using E*TRADE. And what I like to do is that, so this is the range, this is the position in the range in which the trade took place, and you can see that the red over here will be bearish. The green is bullish. So basically you just kinda scroll down and you would think that what, what happens is that when TVIX starts to rise, when you start having an issue where the market is pulling back, where the market is internally weaker than what the charts are showing, you have a lot of sell orders coming off of the dark pool and in the position in the range, it will be over in this red area and you’ll have, you know 70, 80% of all the orders coming off the dark pool in the red area and that’s I you know that the market is really weak and a pullback is eminent, it’s either occurring right now or it could be coming in a few minutes. And when you have this green area over here, this indicates these buy orders coming off of the dark pool or where there at in the range, and this would suggest more bullish buy orders that are being executed. So what I like to do is just kinda see if there is an imbalance, see if there’s a bunch of bulls or if there’s a bunch of bears lined up and you could see, you know, here’s a middle-of-the-road, here’s a bearish one. This one’s bullish, bullish, slightly bearish, slightly bullish, bearish, neutral, bullish, bearish, bearish, bullish, bullish, bullish, bullish, and you just kinda go down and start looking at these different, these different orders that are coming off of the dark pool. And what you’ll find is the market is not that weak. There is, there’s a lot of buy side orders coming off of the dark pool. You don’t have a bunch of, just negative, just sell order, sell order, sell orders. You know you can kinda see here, I’m trying not to go too fast, you guys can kinda see bear, bear, bear, but here’s a bull, bull, bull, bull, bull, bear, bull, bull, bear, bear. So you definitely, then look at that bull, bull, bull, bull, so you definitely do not have one side leaning and really taking the advantage over the other. It’s very split, so that tells me that the sideways action that we just looked at on the major indices is not that bearish folks. We’re not seeing panic selling.
The next thing I like to do is jump over to E*TRADE and look at the aftermarket hours orders, right? Look at the S&P 500 E-minis and the NASDAQ E-minis and what oil and gold are doing. And while the aftermarket hours just started trading, and it’s fairly close to zero, there’s still a bullish bias so you don’t have panic selling here coming out of stocks and you’ve got gold actually down a little bit and silver down while equities are up. Now again, the after-hours trading just started, this could change, but so far we’re seeing a bullish bias in the aftermarket hours. So that really kind of helps set the tone that things are not that bearish just because the market, just because of this action on the market, chopping out going sideways like this, and then the typical, what we’re seeing is the selloff going into the close. This is not anything that looks bearish.