3SOF

This is a very serious warning from the Bond Market to the Stock Market:


Yield-curve inversion not seen in years
Inverted spread typically signals an economic slowdown

An inverted yield curve means short term bonds have an higher yield than long term bonds. It signals economic weakness ahead and in 30 years of economic history it was always right, except in 1998 when we just got the Asian Crisis.

There are a number of other early signs of the Bear waking up from hibernation that we'll discuss on another article that I'll publish tomorrow.

I'll prepare my next bear campaign in detail before the end of 2006, with a mix of short stocks and very conservative put buying.

I'll prepare my next bear campaign in detail before the end of 2006, with a mix of short stocks and very conservative put buying.

Do you mean end of 2005?

If the curve does invert it may not be for long as earnings continue to grow however the 4 year cycle high is due before the end of March - I posted a chart of it earlier.

If an inverted curve does take place it points to a decline about 6-9 months away. But the four year low then takes place about next Oct-Nov.

Will be watching but one way to tell is how many great charts you see daily vs how many poor ones. Right now it is overwhelmingly good charts.

Remember that you act fast going long and slow going short. Meaning do not rush to sell short while we are still in a a good uptrend.

hi,
for those of you who don't know what a inverted yield curve is ( me! ) here is an exellent graphic from http://www.money.cnn.com/ . just go down the first column and click on " how the yield curve works"
thanks
maxi

David
I have not seen your bear case but look forward to seeing your thoughts. I have a few comments on your inverted yield commentary. First, earlier this year Greenspan stated, " I'm reasonably certain we would not automatically assume that it would mean what it meant in the past."
The curve inverted on Groundhog day in 2000 and by Dec 28th 2005 the S&P 500 lost 5.3%.
However, the three times it inverted prior to 2000 the stock market actually went higher.
Finally, the new Fed chair has a history and my read is he won't tolerate an inverted yield curve. Frankly this inversion has been staring us in the face all year long. The consensus is we will see two more hikes. My opinion has been that new chairman might surprise some people, I think this inversion may stop this current rate hike cycle. Greenspan also has a history. He often overshoots his mark. I think he's done it again.

A few times I've heard David say "the end of the bull market that began in March 2003."  However the market was only really bullish from March 03 to January 04. Since the January 04 top the indices have only advanced a couple percentage points in two years. Here's a 3 year chart of the Nasdaq http://tinyurl.com/8hafh and a 3 year chart of the Dow http://tinyurl.com/9mk88. I'd call the last two years a flat market, not a bull market. The charts seem to agree with me.

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20051209&pgnum=1
IS IT THE BEST of times, or is it the worst of times? GDP growth is robust, unemployment is low, and corporate profits, home ownership and household wealth are at all-time highs. The economy is practically roaring. Yet in a recent poll, 43% of Americans said they believe the economy is in a recession!
So with stocks making four-year highs this week, what should you do next? If you believe the numbers, then this is a great time to be long stocks. Bull markets, it's said, climb a wall of worry. Based on those poll results, there's no shortage of worry. With an economy that's objectively quite strong, you've got all the makings of a bull market.

Lucas - it is true if you use the 30 stock DOW or the tech heavy NASDAQ that it looks like the markets have done little but when you look at broad market indexes you see that the advance hs bee pretty steady with some dips.

Using the Value Line with about 1900 stocks you see the long term bull market has been strong since 1991. After the bubble the index did pullback to the 50% retrace which is normal in a bull market and from there it had gone up about 120% making new all time highs.
This is the 15-year chart of it that also shows the 4-year cycles and you can see that we are near what may be a 4-year cycle high. IF so the market may then pullback to Autumn and put in a 4-year cycle low.

http://tinyurl.com/dmkl9

You can also look at the S&P Equal Weight Index that is the largest 500 stocks as it is very similar to the Value Line and has been making new all time highs.

http://tinyurl.com/8uexf

The media does not like people to hear how good the market has been. Fund manages make money - a huge amount if they beat a benchmark - it has nothing to do with real gains - so if the benchmark is down 3% in a year and they only loose 2% they will get a nice bonus. Most now use the S&P weighted index as it is made up 70% with only 100 stocks and the heaviest weightings are ones like MSFT and GE so in most cases that index will greatly under perform the broad market. It is a bogus system to trick investors and make the funds a lot of money. If you bought RSP (the index for the S&P )as an example 15 years ago at 26 and today it is 167 or a 600% or so gain - that is 40% a year so who would buy funds if they only knew.

Anyway to check on the rel market activity it is helpful to pay attention to broad market indexes or special ones if you are a sector trader.

Or here is the NYSE all the stocks in the exchange and very similar to the others

http://tinyurl.com/8c6nc

So do not pay too much attention to the talking heads on TV as they lie when they talk bout the market as these charts plainly show. Look at the 50-day EMAs on these charts and then they break down or when the 50 goes below the 200 day then it will show a bear market but right now all is fine.

When trades or pullback plays stop working that will be a clue but right now they are working just fine with an awful lot of stock braking out each day.

This yield curve talk is just the buzz for them to have something to talk about and in itself meas very little in the short term at least as it only signals that investors are willing to tie up their money for a longer time with no premium so they think the economy will not grow as fast and that is logical as there has been such strong growth for the past 10 quarters.

It is fun to speculate but mostly we trade what the charts are saying and all seems well right now.  --- just waiting for the end of year window dressing to start at any time....

Here is a good article about yields and the yield curve - it even has a little vvideo you can see by pressing play

http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve

My understanding of the inverted yield spread is that it is just at a stage for people to start monitoring (a cautionary red flag)! There were several instances in the past when the inverted yield was of a similar size but the occurence of recession receded! So if the inverted yield increases then we are moving closer to a recession but on the other hand if it recedes then it was just a head fake! But based on David's analysis, it may movce closer to a recession as this time around it is going to be that of a consumer! Howvere there are a couple of analysts predicting a bull market this year; DJI to 15,000! Keeping my eyes peeled.

Fantastic article about the yield curve from the guru Luskin at Smartmoney.com

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20060106&pgnum=1
One thing the bears don't tell you is that the yield curve's track record as an economic crystal ball isn't perfect. It inverted in mid-1998, yet no recession followed. In fact, the years following that inversion were an amazing boom. Don't tell me you've forgotten those wild couple of years leading up to Nasdaq 5000?

I think that one reason that we've not started a bear is because even though the yield curve did invert, we still have low rates. When we had the last recession in 2001 the yield curve had inveretd also, but the rates were a lot higher than they are now. They were above 6%. As it stands now they are not near those levels of 2001. If the yield curve had inverted with much higher rates, than I think we could have a case for a bear. As it stands now I don't think we'll see a bear market unless those rates get as high as they did in 2001.

The correct period to use are the 10 year and 3 month and they have not inverted. If they do invert and if they predict a recession - the times in the past it has worked a recession happens about 6 months later.

It does has not always meant a recession has come.

And you can see how fast it turns back. Note on the chart the positive divergence on the MACD and that is predicting higher rates to come at some point.

For the curve to be negative it has to go under 10 in this chart.

http://tinyurl.com/9clqf