As this chart above indicates every recession that happened in the last 50 years happened after the indicator went negative. This chart is a positive indication that we are not close to a melt down and shows we have a very solid economy. When this indicator turns minus it means the melt up is close to its end. Research shows that at some point the trade war will end. History tells us no one ever wins trade wars. When it ends the market will most assuredly explode to the upside and eventually will end the
bull. Inflation will eventually take over. Advance / Decline Line Typically when we have 70-80% of stocks hitting new highs on high volume this indicates that the markets will move higher than anyone ever expected. Below is a list of new highs and new lows for the last week in September. Sony (SNE)... electronics giant Microsoft (MSFT)... "digital utility" Roku (ROKU)... streaming devices Qualcomm (QCOM)... semiconductors Salesforce.com (CRM)... cloud computing Match (MTCH)... online-dating giant Grubhub (GRUB)... "smart" food delivery Square (SQ)... "cashless" society PayPal
(PYPL)... "cashless" society American Express (AXP)... financial giant Visa (V)... credit cards Darden Restaurants (DRI)... LongHorn Steakhouse, Olive Garden Dunkin' Brands (DNKN)... Dunkin' Donuts, Baskin-Robbins Kellogg (K)... Froot Loops, Pop-Tarts, Eggo Accenture (ACN)... IT consulting Aetna (AET)... health insurance Pfizer (PFE)... prescription drugs Boston Scientific (BSX)... pacemakers, catheters, and stents Abbott Laboratories (ABT)... Similac, Pedialyte, Ensure Dick's Sporting Goods (DKS)... sporting goods Nike (NKE)... athletic apparel Honeywell (HON)... manufacturing giant Home Depot (HD)... one-stop shop for home repairs Lowe's (LOW)... one-stop shop for home
repairs Sherwin-Williams (SHW)... paint O'Reilly Automotive (ORLY)... auto parts Dollar General (DG)... discount retailer T-Mobile (TMUS)... telecom Verizon (VZ)... telecom Newmont Mining (NEM)... precious metals Barclays (BCS)... British bank HSBC (HSBC)... British bank ING (ING)... Dutch bank Ford Motor (F)... Big Three automaker General Motors (GM)... Big Three automaker Two Hundred Day Moving Average This graphical comparison of the current price of a stock and its preceding 200 day moving average is a primary measure of the direction a stock is moving. As long as it’s
value is above the 200 day moving average it is considered in bullish territory. When It is below it is bearish, and when above or below the crossing is a notable typically actionable event. The Yield Curve Another simple but powerful indicator. Perhaps this is the best indicator of all about what is next in the markets. The yield curve is the difference between long term and short term interest rates. No one indicator is universally accepted as the early warning sign of an economic downturn. One indicator, however, has flashed a warning sign before about every recession over the past 60 years. When interest rates rise the yield curve begins to
flatten. The spread that banks will make on interest rates becomes less and profits rapidly decline. Typically, long term rates are higher than short term rates. Investors tie up their money for decades when long term rates are high. The 10 year US treasury yield is 2.86 %. The yield on 2 year treasury is 2.64%. The difference is .22 %. The spread is currently at its flattest level in 11 years. According to Piper Jaffrey, an investment banker, the probability of a recession increases substantially as the spread falls below 0.20%. The flattening of the yield curve is just a trend and nothing to get worried about. But when the yield curve inverts
and short term rates become higher than long term rates, this is the time we need to watch out and be very careful about the future. WE CAN BE PRETTY SURE WHEN THE YIELD CURVE INVERTS RECESSION WILL BE RIGHT AROUND THE CORNER.
What does all this mean? It means we are getting closer to recession, but we are not there yet. We probably have between 12-18 months before it begins to happen. For Investors there will be three takeaways:
- Re-evaluate the bank stocks you own - banks become less profitable when the yield curve begins to flatten and eventually inverts.
- Do not expect the same type of stock returns over the next 5 years that we have had over the last 5
years.
- When you have an opportunity to make money take it.
I hope you have enjoyed this tip as it was a labor of joy and learning and allowed me the opportunity to share some outstanding material with you. Please give us feedback on this wealth tip and what you would like to see in the future. You can reach me at FoundationJL@gmail.com. I am the current Chairman of the FJMC Foundation for Jewish Life. |