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Analysis

What is the Smarter Market Telling us?

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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.

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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.




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Altcoins

Ethereum Price Analysis: ETH/USD Bearish Flag Structure Eyed

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  • Ethereum price has stabilized but is moving within a dangerous range-block formation.
  • ETH/USD via the daily chart view is forming a bearish flag pattern.

ETH/USD price action has stabilized over the past five days, and is moving within a narrowing range. This movement appears to be somewhat expressing potential downside risks after the selling pressure seen in the second week of January. As a recap, the price was supported in its move north from mid-December 2018 up to 7th January. An ascending trend line was proving necessary comfort in this trend higher, however markets bears managed to force a breach. The support gave way, opening the door to a fresh wave of selling from 8th January.

ETH/USD daily chart.

Around 30% of the bull run that was seen in the above-mentioned period has been reversed. Vulnerabilities continue to linger, as ETH/USD trades around key daily support. The level to be aware of is $116.70, which is vital ahead of the big psychological $100 mark. A breach could see a test of daily support at $102, with the price likely to consolidate between here and $116. Given prior behavior around these areas, ETH/USD may be forced to retest the December 2018 low, $83.10. This would likely be the case, should a return of bullish momentum not see a pickup in pace soon.

Constantinople Hard Fork Delay

The stability in price is surprising given the let down for the community with regards to the heavily anticipated Constantinople hard fork. As reported by the CCN team, Ethereum’s core developers called for the Constantinople upgrade to be delayed. This was just some hours before the hard fork was scheduled to go live on the network. ETH/USD fell double-digits on the back of this being postponed. A drop of 10% was observed.

Technical Review – ETH/USD

Looking via the daily chart view, price action is forming a bearish flag pattern structure – the pole which is seen with the fall from 7-10th January. In terms of the actual flag, this is the current range-block viewed. Upside resistance can be seen just ahead at $135, and lower support noted the mentioned $116.70 area. The next major areas of support are the $102 daily pivot point, the December 2018 low of $83.10, and then lastly, the May 2017 low of $65.85.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

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.

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4.6 stars on average, based on 107 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Crypto Update: Sideways Drift Continues but Sellers Still in Control

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While the bounce on Monday gave some hope to crypto bulls that last week’s plunge was just a correction in an ongoing broader counter-trend move, so far, we haven’t seen meaningful follow-through. That means that the bearish short- and long-term trends are still dominant in the segment and sellers are clearly in control of every major top coin.

Also, while volatility is relatively low, correlations are still elevated, and volume patterns are bearish as well, so our trend model remains on sell signals with regards to the overwhelming majority of coin on all time-frames. Traders and investors are still advised to stay away from entering new positions, as we have no evidence the bear market is over, and at least the test of the lows is likely in the coming months.

That said, a quick recovery above the primary resistance levels would be a positive sign here, but until we see signs of technical strength, the defensive approach is warranted as bearish risks remain very high here.

BTC/USD, 4-Hour Chart Analysis

Bitcoin’s relative stability is still the only positive sign among the top coins, but BTC also lacks bullish momentum and it failed to leave the close vicinity of the key $3600 support level. The $3850 resistance is out of reach, for now, and given the clearly bearish long-term setup, traders and investors shouldn’t enter positions here.

A move above that level would be a positive sign for bulls, with further zones between $4000 and $4050, and near $4450, but we still expect a move towards the support levels near $3250 and $3000 in the coming weeks, even if a broader bottoming process might already be underway.

ETH/USD, 4-Hour Chart Analysis

While Ethereum spiked higher again towards the $130 resistance level today, the move failed again and bulls failed to make technical progress, with the recent low still being in danger. A sustained push above $130 could still signal a failed break-down pattern, but the lack of bullish momentum points to a continuation of the decline.  Key support is found near $120 and between $95 and $100, while further resistance is ahead at $145, $160, and near $180.

Altcoins Unchanged and Bearish After Choppy Day

LTC/USD, 4-Hour Chart Analysis

The volatility compression continued in all of the major altcoins as well, but the broad selling pressure is still apparent in the segment. Litecoin failed to get close to the primary resistance zone near $34.50 despite the early-week rally attempt, and it continues to threaten with a move below the key $30-$30.50 support zone.

A breach of support would likely trigger a move towards the $26 level, with the oversold short-term momentum readings now being cleared in the market of LTC. Further strong resistance is ahead near $38 and $44 and with support found near $23, and traders and investors still shouldn’t enter positions here.

XRP/USDT, 4-Hour Chart Analysis

Ripple has been showing signs of relative weakness again today, after the brief period of stability and the technical picture continues to be negative on all time-frames, and our trend model is also on short- and long-term sell signals. The $0.32 price level is still in focus, and we still expect a move below $0.30, with strong support found near the $0.26 level, with resistance ahead near $0.3550 and $0.3750.

DASH/USD, 4-Hour Chart Analysis

Dash remained among the relatively weaker majors as well, and it still hovering around the $70 price level after bottoming out close to $67.50. A test of the bear market low near $56 seems very likely in the coming weeks, and only a move above the strong resistance zone between $76.50 and $80 would change the short-term outlook for the coin.

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.

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4.7 stars on average, based on 443 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.




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Analysis

Crypto Update: Zilliqa a Good Buy on Dips

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Zilliqa (ZIL/BTC) has been on our radar ever since it revisited a price level of 0.0000039 on November 20, 2018. At that point, we were curious whether the market would respect its previous low or breach the support and print a new 2018 low. We got a little bit of both and that’s the stuff that makes crypto very exciting.

While Zilliqa printed a new 2018 low of 0.00000347 on November 25, bulls managed to lift the market back above 0.0000039 on November 27 with heavy volume. This fakeout gave this coin a new lease in life and the market is not taking the opportunity for granted. In this article, we reveal why Zilliqa presents a good buy on dip opportunity.

Solid Base at Parabolic Support

Zilliqa bottoming out and accumulating around 0.0000039 is no coincidence. This is the level where the market rejected lower prices in March 2018. Zilliqa’s ability to stay above 0.0000039 back then sparked a parabolic run that saw the market climb as high as 0.00002508 on May 10. Thus, it is not surprising for the market to return to its low level and start a new market cycle.

To build its base, Zilliqa spent 154 days range trading between 0.0000039 and 0.000006. That’s over five months dedicated to accumulation. We’ve seen many altcoins with significantly shorter accumulation periods launch massive bull runs.

Daily chart of ZIL/BTC

With a solid base in place, you can be fairly certain that market participants will buy the dips. Like you, they also likely know that the market spent a lot of time base-building. Therefore, they’ll take advantage of any opportunity to get in cheap before the market launches its bull run.

Breakout from Consolidation

After five months of base-building, the market appears ready to break out from a double bottom pattern. It made a strong push yesterday, January 15, 2019, to take out our range high of 0.000006. The move up was supported by above-average volume. So far today, the market has managed to stay above 0.000006.

ZIL/BTC Double bottom breakout

This price action tells us that Zilliqa is raring to launch a bull run. This type of bullish momentum is rare in crypto nowadays. With so many suffering from heavy losses in this bear market, a lot of people are eager to ride on markets that are showing bullish potential. As Zilliqa continues to show strength, participants will likely buy on dips in the hope of either growing their capital or recouping losses.  

Key Levels to Watch

If you’re looking to place a long position in Zilliqa, we believe that one of these two scenarios can play out.

The first scenario shows the market pumping in the next few days. The pump might send the market to as high as 0.00000685 where Zilliqa will likely face heavy resistance from bears. If bulls succumb, Zilliqa might retest 0.000006 before resuming its uptrend.

ZIL/BTC Scenario 1

The other scenario involves an immediate throwback as Zilliqa succumbs to profit taking. We can see it retesting support of 0.00000575. If Zilliqa respects the support, the market would print a bullish higher low setup. This will likely send the market to greater heights.

ZIL/BTC Scenario 2

Bottom Line

With an extensive base and a recent breakout from consolidation, Zilliqa is a good buy on dips. It appears that the market now belongs to a small group of alts that show bullish potential. This makes Zilliqa attractive to investors who are looking to grow their capital or recoup their losses.

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.

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3.8 stars on average, based on 309 rated postsKiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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