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.

// -- Discuss and ask questions in our community on Workplace.

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?

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

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 8 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?

Analysis

Crypto Update: Coins Remain Under Pressure but Supports Still Hold

Published

on

The correction of the post-crash rally is still dominant in the cryptocurrency segment, despite the encouraging bounce on Friday, as Bitcoin is dragging the market lower. The coin turned relatively weak in recent days after an extended period of outperformance, but even BTC is holding up well, with the bearish momentum being far from disastrous.

// -- Discuss and ask questions in our community on Workplace.

Ethereum’s relative strength, on the other hand, is slowly building, as we first noted it during the Thursday sell-off, and the second largest could be spearhead the next leg higher. The early leaders of the rally, Ethereum Classic and Litecoin are also acting bullish, and the overall picture remains in line with the orderly correction scenario.

BTC/USD, 4-Hour Chart Analysis

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Bitcoin still hasn’t tested the key $9000-$9200 zone despite several waves of selling that hit the coin, but it’s still stuck below the $10,000 level. We expect a short-term bottom in the coming week, as the momentum of the decline suggests accumulation, and investors should use the dip to add to their holdings, even if a test of the primary support zone is still possible here, with further resistance levels ahead above $10,000 at $11,300, $11,750, and $13,000.

LTC/USD, 4-Hour Chart Analysis

Litecoin put in a higher short-term low during the weekend, retaining its leading position in the rally from a technical standpoint. The MACD indicator already gave a bullish signal after dipping into negative territory, but should Bitcoin continue to struggle, LTC could be in for more consolidation before despite the relative strength. The $200 level is still in focus with a strong resistance zone just ahead between $220 and $235, with the rally high at $250, while further key support is at $180.

Altcoins Mixed in Quiet Trading

ETH/USD, 4-Hour Chart Analysis

Percentage changes are not significant today following yesterday’s decline, and most of the majors are holding up above or near key support levels, with relatively low volatility and notable divergence between the coins.

As for the recently weaker coins, Ripple is still trading well below the $1 level, while IOTA managed to bounce hard off the correction low reaching back to the $1.9 resistance, and edging closer to a break-out from the still dominant downtrend.

The rest of most established coins are still drifting lower, with no major moves in the last few days, so without notable red flags, we remain positive regarding the long-term setup.

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...

4.7 stars on average, based on 115 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

Daily Analysis: Oil Extends Rally as Nasdaq Leads Stocks Higher

Published

on

Friday Market Recap

Asset Current Value Daily Change
S&P 500 2749 1.38%
DAX 12,483 0.18%
WTI Crude Oil 63.58 1.29%
GOLD 1330.00 -0.16%
Bitcoin 10,14 -0.09%
EUR/USD 1.2295 -0.28%

US equities built up some bullish momentum towards the end of the week, ignoring the technical damage that the volatility-crash caused, and the major US indices rallied into the close today, squeezing the shorts. The Nasdaq, which led the rally as we expected, took out the key 6850 level in late trading and added another percent to, incredibly enough, finish only a hundred point of the all-time high.

// -- Discuss and ask questions in our community on Workplace.

NASDAQ 100 Futures, 4-Hour Chart Analysis

Should the tech benchmark retest the high next week, it will be amid very strong negative divergences, but hey, those divergences have been building for months now. The rally in equities was boosted by the dip in Treasury yields, especially at the long end of the curve, while Amazon continued ot lead the charge, closing right at the historic $1500 per share level.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Russell 2000 (Small Cap) Index, 4-Hour Chart Analysis

The advance in the Dow and the S&P 500 is much less convincing and with small caps also lagging the tech-behemoth juggernaut, we remain skeptical regarding the sustainability of the move. That said, if the broader indices stay above the key levels, we will be trading the long side in equities, even as from an investment standpoint, valuations are still way above acceptable.

Forex Markets and Commodities

The lackluster performance of European and Asian stocks adds to the negative divergences, especially as the Euro stopped appreciating against the Greenback, and that should be helping stocks of the old continent. Of course, the DAX and the EuroStoxx 50 could play catch-up next week, barring another surge in the common currency.

EUR/USD, 4-Hour Chart Analysis

The most-traded forex pair remains in a short-term downtrend, as it failed to recapture the previously broken rising trendline, and the commodity related risk-on currencies also remained under pressure. The Canadian Dollar did bounce back off yesterday’s 8-week lows, boosted by the much hihger than expected inflation release and the jump in the price of crude oil.

USD/CAD, 4-Hour Chart Analysis

Oil benefited from the positive shift in sentiment, while the Syrian situation, which took a backseat in the headlines, still supports the rally. The Japanese Yen and gold were stable amid the risk-rally and that adds to our suspicions regarding the upside potential form these levels.

Cryptocurrencies

The segment started out the day with a strong bounce that carried the major coins higher by around 10%, but given the recent steep short-term pullback, even that wasn’t enough to turn the tide, and the day ended with an (almost usual) sell-off after the US close. Despite the recent volatility, the overall picture is still encouraging, with most of the majors being safely above the crash lows, likely in a new bullish cycle that has the potential to last for several more weeks or even months.

While new all-time highs are it guaranteed following the 60-70% declines among the largest coins, but even without those, plenty of upside potential is left for investors. With that in mind, investors should hold on to their coins and even add to their holdings on the short-term dips like the current one.

ETH/USD, 4-Hour Chart Analysis

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.
4 votes, average: 4.75 out of 54 votes, average: 4.75 out of 54 votes, average: 4.75 out of 54 votes, average: 4.75 out of 54 votes, average: 4.75 out of 5 (4 votes, average: 4.75 out of 5)
You need to be a registered member to rate this.
Loading...

4.7 stars on average, based on 115 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

Technical Analysis: Majors Stage Rally but Strong Levels Still Ahead

Published

on

The cryptocurrency segment has recovered from a broad correction today in early trading, with the most valuable coins all turning into green during the session, despite the bearish start to the overnight session. With bottom-to-top gains of up to 15%, the rally helped in easing the worries of bulls, especially in the case of the relatively weaker coins.

// -- Discuss and ask questions in our community on Workplace.

Bitcoin and most of the largest altcoins remained stable during the selloff, and BTC recaptured the $10,000 level quickly after trading as low as $9600 overnight. The initial rally topped out near $10,400, and the coin is trading back near the $10,000 level, as the bullish momentum faded away somewhat.

BTC/USD, 4-Hour Chart Analysis

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

That said, we expect the uptrend to continue even if the correction could still carry Bitcoin lower. Further strong support is found between $9000 and $9200, while targets are ahead at $11,300, $13,000, and $14,250.

ETH/USD, 4-Hour Chart Analysis

Ethereum showed strength during the bounce again after yesterday, together with the early leaders of the rally, and although the coin dipped below the $845 level in the second half of the session, the signs remain positive for bulls. Support levels are now found at $780, $740, $625 and $575, while resistance is ahead near $910 and $1000.

(more…)

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.
8 votes, average: 4.88 out of 58 votes, average: 4.88 out of 58 votes, average: 4.88 out of 58 votes, average: 4.88 out of 58 votes, average: 4.88 out of 5 (8 votes, average: 4.88 out of 5)
You need to be a registered member to rate this.
Loading...

4.7 stars on average, based on 115 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