Connect with us

Analysis

What is the Smarter Market Telling us?

Published

on

The inverted yield curve in the bond market has a 100% record of predicting recessions since the late 1960s. A recession affects all asset classes. Therefore, it is essential for all the investors to be aware of the developments in the bond market.

Key observations

  • The bond traders have a very high probability of predicting recessions
  • The yield curve is flattening
  • Do the bond traders sense a trouble
  • Slow economic growth and weak inflation continue to be a worry for the Fed

What are we Focusing on?

We are interested in analyzing the yield curve between the 2-year and the 10-year Treasury. Ideally, the curve should be sloping upwards, because if the short-term yield moves up, the long-term yield should also follow suit. After all, the long-term bond holders should demand a higher yield because, with time, risk and uncertainty increases.

However, at times, the yield curve flattens or even inverts.

When does this happen and why?

The short-term yield is dependent on the federal funds rate, which is set by the US Federal Reserve to fulfill its mandate of maximizing employment, stabilizing prices, and moderating long-term interest rates. However, the long-term rates are set by the bond traders, based on their expectations of inflation, economy and future interest rates.

Therefore, at times, the bond traders are in conflict with the expectations of the Federal Reserve.

So, who should we listen to? The bond traders or the US Federal Reserve.

Bond Traders have been right Every Time in Predicting Recessions

The above chart showcases the difference between the 10-year and the 2-year Treasury yields. One can see that every time the differential has dipped into the negative i.e. when the yield inverts, the economy has fallen into a recession.

The uncanny ability of the bond markets to correctly predict a recession makes it even more important to study the bond market closely.

As seen in the charts, the differential between the 10-year and the 2-year Treasury is in a declining trend and that has got a number of bond traders worried.

Why is the yield curve flattening now?

A yield curve is termed to be flat when the 2-year and the 10-year both have the same rates. Though we are not there yet, the differential has fallen from about 2.66% on 31 December 2013 to 0.98% on July 7.

The yield curve had recovered post President Donald Trump’s election victory, on hopes of a major tax reform and a large fiscal boost. Those steps would have pushed the US GDP and inflation figures higher. However, as the President’s tenure commenced, hopes for a quick reform began to fade and the price differential collapsed. It touched a low of 0.78% just over a fortnight ago. However, since then, there has been a small rebound.

Where is the Curve Now?

The short-term rates are closely linked to the Fed funds rate. As the Fed made its intent clear to bring an end to the ultra-loose monetary policy, the 2-year Treasury rates began to inch higher. It is up from about 0.25% on 12 July 2012 to the current levels of 1.40%.

However, during the same period, the 10-year has traded in a range of about 1.40% to 3.0%. Currently, it is at 2.39%.

Therefore, as you can see, the 2-year has rallied 460% in the past five-year period, whereas, the 10-year has only risen about 71%. This difference in the speed of ascent has led to the curve flattening.

What is the Reason for Flattening of the Curve?

The US Federal Reserve and a number of other central banks across the developed world maintained an ultra-loose monetary policy to support the economy following “The Great Recession”. The Fed reduced interest rates to near zero in December 2008. It then followed it up by a series of quantitative easing measures, where it purchased bonds in the market to improve the liquidity conditions. The easy monetary situation helped boost asset prices across the board.

As the financial condition improved and the economy showed signs of a recovery, the Fed decided to taper its bond purchase before winding it down completely. Nonetheless, the central bank continued to reinvest the proceeds from the bonds that mature.

With the economy on a strong footing and financial risks having reduced, the Fed finally decided to bring an end to its easy monetary policy.

In December 2015, after months of delay, the Fed finally raised rates for the first time since 2006. The second hike, thereafter, had to wait until December 2016.

However, since then, the Fed has increased the pace of its tightening. It has hiked rates twice already in 2017 and is likely to tighten once more by the end of the year. For 2018, it has hinted at three to four rate hikes.

Economic Growth and Inflation Don’t Support Fed’s Bullishness

In its June policy meeting, the US Federal Reserve outlined a plan to shrink its massive $4.5 trillion balance sheet. Though the unwinding is expected to be gradual, it will affect the markets nonetheless. Clubbed with tightening rates this will affect the economy adversely, especially as growth and inflation are not yet showing considerable strength.

The International Monetary Fund (IMF) has recently cut its 2017 and 2018 US GDP forecast to 2.1% from its earlier prediction of 2.3% and 2.5% respectively. The US GDP growth of about 2% is neither great nor a disaster.

On the other hand, the annual US inflation, which had hit a five-year high of 2.7% in February of this year has already slowed down to 1.9% in May.

What are the Economists and Analysts Forecasting?

“We think that inflation expectations will be stubbornly low over the course of the next 18 months. I wouldn’t be surprised to see last week’s sell-off, where interest rates on the 10-year went to [2.3 percent], actually reverse itself,” Washington Crossing Advisors portfolio manager Chad Morganlander told CNBC last week.

On the other hand, Craig Johnson, chief market technician at Piper Jaffray said: “I feel even stronger about our year-end call of 3, 3.25 [percent] in the 10-year bond yield at this point.”

Michael Pento, the president and founder of Pento Portfolio Strategies and author of the book, “The Coming Bond Market Collapse”, and the producer of weekly podcast, “The Mid-week Reality Check”, wrote in his commentary on CNBC that “the yield curve will invert by the end of this year and an equity market plunge and a recession is sure to follow”.

David Rosenberg, an economist in Toronto points that the trusted financial indicator is giving us a warning of the forthcoming trouble. He advises to keep cash in hand and adjust the portfolios. He said: “I can’t tell you when it is going to happen, but the economic cycle has not been abolished, and the chances of a recession are rising.”

On the other hand, Edward Yardeni, of the Yardeni Research is positive on the stock market. He says that the current low bond yields point to a prolonged period of low inflation. However, he cautions that things will change if the Fed delays in raising the short-term rates, as it will lead to irrational exuberance, which will push the stock prices into extremely overvalued territory.

So, what should the Equity Investors do Now?

The analysts and economists are divided in their opinion as these are unprecedented situations. It is, therefore, difficult to correctly forecast what will happen. We are still some distance away from the inverting of the yield curve.

The current valuations of the S&P 500 are stretched, however, there is nothing stopping it from getting overstretched. Therefore, traders should continue to hold their positions with close stop losses. New investments should be done sparingly. It is better to remain in cash to invest at lower levels, which offer a better risk-reward ratio.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




Feedback or Requests?

Altcoins

Crypto: Is Relative Value Investing Time Finally Here?

Published

on

For at least the past six months you have been kind enough to listen while the topic of relative value in cryptocurrencies has repeated more than once.  Could it finally be happening? Things are certainly in place. It seems to show every time the price of Bitcoin or any of the altcoins suddenly spikes for no apparent reason.

That is the time when investors buy crypto simply because there is no better value in things like stocks, bonds, real estate, gold or currencies.  So far this has not happened all that often, but things could finally be changing. The fact that crypto prices remain near 2018 lows, and with certain exceptions, the news has been pretty good, helps set the stage.

Until now investors in conventional assets have been simply too content.  And why not, the economy in the US is humming at a 4.2% annual rate. The S&P 500 has tacked on another 8.5% so far and seems to be cruising through the traditionally volatile month of September to reach new records.  

And here is the real tattle tale, the CBOE VIX is near 2018 lows around 11. Without going into all the details, the VIX is Wall Street’s traditional measure of investor fear.  During the 2008 financial crisis, the VIX hit 60. Back in February it was at 37. That was about the time the S&P 500 fell 10%. So get the idea: today, investors are too content.  That needs to change before crypto’s relative value shines through. Here is something to focus on.

The key to the above average S&P performance has been the contribution of the tech sector. When you take out the near 22% increase from the market cap weighted S&P, well, you cut well over half of that performance down to only about 3%.  That still not bad, but it indicates a far more narrow market than smart investors should be comfortable with. What would happen to the VIX if the tech sector suddenly took a dive of 10%?

Sound crazy? Hardly, a 10%+ correction in tech stocks has taken place three times just since 2016, so this isn’t a far fetched idea.  In fact Barbara Kollmeyer at MarketWatch just penned an article titled: Bad news is building for this once-hot tech sector.  If her views prove out, this could be the key to driving investors to some of the values offered by crypto.

It all starts with the social media companies that form the backbone of the FANG stocks. Here is a sample. She opens with the thoughts of Tony Greer who heads TG Macro and who has a sour message on Twitter (TWTR) and Facebook (FB). According to Tony: “It’s finally time to be short social media” pointing out a “massive topping pattern.”

While the stock market generally may not be experiencing traditional levels of volatility, lately tech stocks have charted a different course.  In referring to that change, Greer identifies September as a time of big change.

“That period of volatility put in a big top and a double top in the social media ETF. Now it has broken its steepest ascending trend line, it’s broken down below all the major moving averages and they’re starting to curl over on top of it, which to me is going to cause another leg of a waterfall.”

The final proof of technical weakness is shown in the Global X Social Media ETF that contains a handful of social media names from Facebook, Twitter and Alphabet. This little gauge is actually down around 3% this year.

In addition to his technical observations, he points the negativity surrounding the Cambridge Analytica scandal, subsequent upbeat earnings, then news that the platform was losing users.

Technology Is More Than Social Media

Lest we look for just any reason to be buying crypto it is only fair to mention the obvious. So far this year the tech sector has managed to add 22% even with the substantial underperformance of social media.  Any notion of painting the world coming to an end would be misleading.

However, technology has many interrelated links and sometimes when one sector is under pressure it can spread.  In the meantime the gap between overvalued stocks and depressed crypto prices is setting the stage for the search for value to have its day in the sun. So keep one eye on the VIX.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
2 votes, average: 5.00 out of 52 votes, average: 5.00 out of 52 votes, average: 5.00 out of 52 votes, average: 5.00 out of 52 votes, average: 5.00 out of 5 (2 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.4 stars on average, based on 105 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




Feedback or Requests?

Continue Reading

Analysis

Pre-Market: S&P 500, Dow Hit Record High Amid Global Rally

Published

on

The major global indices are marching higher in a concerted fashion today, as the risk-on shift that started after Trump’s trade announcement continues in earnest. Asian stocks were up, but not enthusiastic, while European equities are strong, with the major benchmarks being around 1% higher today. The US market is still the island of bulls, and with the surging past the January highs, all of the major indices left behind the deep correction that started with the VIX-induced crash in February.

S&P 500 Futures, 4-Hour Chart Analysis

The S&P 500 is also trading at its record high after the open, and although the Nasdaq is still shy of its respective all-time high, and small caps haven’t joined the party either, the technical advantage of Wall Street is striking.

The Dollar’s dip is clearly helping risk assets globally, even as emerging markets are not particularly strong, since the rising US Treasury yields are making some investors cautious amid the risk rally.

10-year US Treasury Yield, 4-Hour Chart Analysis

The bond selloff, or yield surge, is arguably the most important trend of the current market, and as the Fed’s meeting will take place next week and there are no crucial events before it, the trend could even accelerate before the likely rate hike.

Whatever happens, yields are already at multi-year highs across the curve, and the tighter credit conditions will likely further squeeze the most vulnerable countries in the next risk-off period.

Euro Hits 2-Month High as Dollar Still Under Pressure

EUR/USD, 4-Hour Chart Analysis

Economic releases were clearly on the bullish side today, with British Retail Sales and the Philly Fed index both beating the consensus estimate. The British measure was a huge positive surprise and that helped the Pound and the Euro in hitting two-month highs against the USD, which has been drifting lower against most of its major peers during the current risk-on shift. The EUR/USD pair topped the 1.1750 level before pulling back slightly, while the GBP/USD pair is trading above 1.32 currently.

Copper, 4-Hour Chart Analysis

Commodities haven’t followed stocks higher today, with copper and the WTI Crude contract both losing some ground. Copper still failed to show meaningful strength, and it was hurt today by the relative weakness of the Chinese stock market as well.

On the other hand, precious metals ticked higher, with gold edging closer to its one-month high near $1220, thanks to the weakness in the Dollar. Gold might be ready for a stronger rally, as its stability amid the rising Treasury yields is impressive following months of weakness.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.6 stars on average, based on 349 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




Feedback or Requests?

Continue Reading

Analysis

Crypto Update: Coins Settle Down After End-Of-The-Day Bitcoin Madness

Published

on

While the short-term technical setup has been little changed in the cryptocurrency segment in the past 24 hours, a volatile dump&pump period made headlines in Bitcoin. The most valuable coin got smashed lower right before the futures market close, violating the $6275 support and plunging as low as $6100, triggering a downgrade in our trend model to neutral. BTC than surged higher a few minutes later and shot up to the $6500 resistance before settling down near $6400, where it stands today in European trading as well.

The possible manipulation event (or simply a closing imbalance in the futures market) dragged the rest of the market with it, although the moves were less pronounced in altcoins, and today, the market has been calm across the board, with most of the majors sporting modest gains amid the improving sentiment. On a positive note, Ripple is holding on to its gains from Tuesday, and today’s new swing high triggered a buy signal, which is a much-needed positive sign for the still generally bearish segment.

BTC/USD, 4-Hour Chart Analysis

Bitcoin’s long-term outlook is unchanged but the quick recovery from yesterday’s spike lower is a plus for bulls, even as the $6275 level is still in focus and the coin still haven’t shown strong bullish momentum.

With that in mind, traders should still be cautious with new positions, since the short-term outlook for the segment remains mixed, and BTC continues to trade dangerously close to the key long-term zone near $5850. Below $6275 further support is found at $6000, while resistance is ahead at $6500, $6750, and $7000.

ETH/USD, 4-Hour Chart Analysis

Ethereum continues to trade at a very important technical juncture, trying to establish a short-term uptrend after last week’s rally and avoid a re-test of the bear market lows. The fact that Ethereum remained stable amid yesterday’s Bitcoin move, and recovered to its short-term trading range is positive, but the coin has to show bullish momentum soon to remain on a short-term buy signal.

A sustained move below $200 would warn of a re-test of the lows but a new swing high could open up the way towards $235 and $260, with further strong resistance ahead between $275 and $280. Traders could still enter new short-term positions, but full positions are still not recommended given the bearish long-term trend.

Ripple Hits 1-Month High Above $0.35

XRP/USDT, 4-Hour Chart Analysis

Ripple is rallying again today, scoring a new high above the key resistance zone near $0.35 and triggering a buy signal in our trend model with the bullish swing. The next major resistance zone is found near the $0.42 price level, close to the dominant broad declining trendline, with a weaker short-term resistance level at $0.3750, the August spike high, and found at $0.32, $0.313, and $0.30. The coin is still on a long-term sell signal, despite the current move, and traders shouldn’t enter full positions here.

LTC/USD, 4-Hour Chart Analysis

Litecoin is trading in a very narrow range today, and volatility declined progressively in since the selloff two weeks ago, which will likely lead to a strong momentum move as early as the coming days. A bullish move would be important for the whole segment, as it could point to a developing leadership, with Monero, Stellar, and Dash also being in possibly bullish setups. Primary resistance is ahead at $56, while support is found near $51.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
1 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 5 (1 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.6 stars on average, based on 349 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




Feedback or Requests?

Continue Reading

Recent Comments

Recent Posts

A part of CCN

Hacked.com is Neutral and Unbiased

Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

Trending