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Thursday’s (Nov. 10) monstrous rally in the stock market (the Dow Jones Industrials rose 1200 points, or nearly 4%) due to slightly higher awareness of October’s CPI inflation was the epitome of a “relief rally” in a bear market. That’s my opinion, while other smart heavyweights (billionaire traders, actually) like Carl Icahn agree. Icahn gave the impression on CNBC after the close, explaining his considerations and logic about proceeding to hold many short positions.
Lately I do not maintain short positions or hedge of index put options. I kept between 60% and one hundred percent of my portfolios in money throughout the year. Fortunately, my giant 20% long position in valuable metals gained with stocks this week, and a 15% weighting in non-unusual stocks to the upside with Wall Street’s rush to buy. Did I conclude that the lowest point was reached and I clung to the crowd toward greater fair weighting?No, I did the opposite. In fact, I sold some features in the massive rally, reducing my exposure to stocks (outside of miners and gold/silver/platinum assets) from 15% to less than 10%.
Why do I distrust rallies? The main explanation for why is that the yield curve of the Treasury bond market is screaming that a recession is coming. The Federal Reserve will not be happy with a 7% CPI. Members come out today to say rates will rise again at the next FOMC meeting. So if interest rates rise through 2023 and the full effect of the bear bond market takes 6 to 12 months (on average) to manifest itself in the economy, I am again involved in the fall in corporate profits in the early part of 2023. This is how the world has worked in the past. The design of the yield curve since October, now “officially” inverted between 3-month and 10-year Treasuries (the point where short-term rates contract liquidity and credit creation), cries out for primary disorders because the economy is ahead.
Statistically speaking, since 1982, EVERY investment has led to a drop in inventory costs, immediately, a year or later. My suggestion is not to be too excited about the increase in inventory costs this week. A few more weeks or months? Sure, but any other rally deserves to be sold aggressively, not bought. Here’s why. . .
When you take a look at economic history, many of the worst times to own non-unusual stocks (especially industry names) occur between the moment it looks like an inverted bond yield curve and the middle of a recession (often caused by an investment). Several weeks ago here, I talked about the turmoil for our economy created by the crash in the bond market in 2022. This story is another important article that looks more directly at how the Dow Jones Industrial Average reacts and after yield curve inversions, with the SPDR Dow Jones Industrial ETF (NYSEARCA:DIA) being the simplest way to industrialize it.
Below are charts comparing 3-month Treasury yields to 10-year yields. When short-term rates are higher than long-term rates, we get a positive number for my “investment” indicator. Recessions have been attenuated since 1982.
YCharts: Treasury investment, 3-month rate minus 10 years, since 1982
Below, we can take a look at Dow Jones Industrial’s reaction to inverted yield curves. 2020 and 1982 saw inverted curves a recession. Usually, bond market disruptions appear first, and the economy/stock market falls 6-12 months later.
YCharts: Dow Industrials price, yield curve inversion, shaded recessions, since 1982
As we approach, we can dissect each liquidity contraction (loan) and the correlated recession in economic activity. The last Treasury market reversal occurred in mid-2019 and at the beginning of the pandemic recession in 2020. Since the first point reversal in June 2019, the Dow Industrials is up another 10%, before falling 30% on the COVID-19 pandemic.
YCharts – Dow Industrials Price v. Inverted Yield Curve, Author Benchmarks, May 2019 to April 2020
Leading us to the banking crisis of the Great Recession and the housing collapse, Treasury yields reversed in 2006 and early 2007. From August 2006, the Dow continued up to 20% until the end of 2007 before imploding to 50% in the following year and a half.
YCharts – Dow Industrials Price v. Inverted Yield Curve, author’s benchmark, January 2006 to September 2009
Dow Industrials peaked in January 2000, the year the Dotcom technology boom turned into a slump. In this case, many stocks reached the most sensible level before the reversal of Treasury yields gave the impression in the current part of the year. Measured from peak to low, the Dow Jones fell nearly 40% in October 2002. Since the initial bond market reversal, costs have fallen 30%.
YCharts – Dow Industrials Price v. Inverted Yield Curve, author’s benchmark, January 2000 to December 2002
You have to go back a decade to locate some other example of treasury reversal. From mid-1989 onwards and from November to December, short-term rates exceeded long-term yields. In January 1990, peak stocks peaked, while the Dow Jones was able to zigzag up in July. Measured since the initial investment in June 1989, the Dow was able to rise another 20%, before falling more than 20% of peak oil and the Persian Gulf War with Iraq in the fall. of 1990.
YCharts – Dow Industrials Price v. Inverted Yield Curve, author’s benchmarks, May 1989 to March 1991
The 1979-82 era saw abundant stagflation and several definite recessions in genuine GDP output. For our purposes, the 1982 reversal came amid a prolonged economic contraction (with some similarities to the example of the 2020 pandemic). Investment first gave the impression in February 1982, when the Dow fell another 15% for six months (using intraday statistics).
YCharts – Dow Industrials Price v. Inverted Yield Curve, author’s benchmark, January-December 1982
The implosion of bitcoin and cryptocurrencies this week are new pieces of the puzzle of evaporating liquidity, indicating that true disorders must defend the monetary formula. Rumors of poor formula liquidity in the Treasury market have persisted for several months. The yield curve is a serious development, and more evidence of difficulties for the economy is coming.
A secondary argument opposing a sustained low in stocks in October, Thursday’s stock value rise outpaced gold/silver bullion. In fact, financial steels have failed to keep up with the percentage increase in stocks overall (and are lagging behind early October’s advance). . My belief, which I have discussed several times since the summer, is that valuable steels deserve to recover first and faster than the stock market as a whole to the final minimum point and beyond. Precious steels tend to recover temporarily after a liquidity crisis and/or recession. Yes, gold, silver and platinum are starting to recover a bit. For me, reading Thursday’s action as part of a new multi-year bull market, I would expect the value of valuable steel bullion to rise sharply in the coming weeks. If they don’t, the back of Wall Street hasn’t arrived yet.
Other US indices and primary ETFs, the SPDR S
Historically, stocks melt and rise toward the middle or end of a recession (which didn’t even start in November), weeks or months after the Fed went from a rate hike to a drastic cut.
I hope I am and wish I had better news for readers. But my task is to inform you how I see it, based on 36 years of trading and investment. This bear market may also take another 3 to 6 months. (or more) to locate a lasting casualty. Patience will be required. Ultimately, your portfolio and long-term wealth are likely to depend on your caution and expect a smarter (perhaps much lower) hotspot for U. S. stocks.
Again, my risk-adjusted suggestion is to simply sit on currencies and invest in currencies by paying an annual interest of 3% to 4% (CD, coin markets, Treasury bills). In my opinion, direct market hedges are too expensive and the market might not. Slip without delay from today. There’s nothing wrong with holding stocks, just keep your weights on the low side. This is not the time to be a hero or be exploited for long in any way. The big days of decline resume for the market.
Reluctantly, I change my 12-month rating for US market index ETFs. The U. S. states has a liquidation position relative to the retention setting I’ve been suggesting since May. The possibilities are now favorable for a solid or reduced inventory market until October 2023.
I position the possible upside praise for the position of the US stock market. The U. S. economy is at a low of 5% to 10% over the next 12 months, especially with dividend yields near record lows of 1. 6%. The theoretical disadvantage of a severe recession may be simply: 30% to -40%.
Hopefully, the peak of the bearish promotion will end until March. However, a sharp drop of more than 20% in the Dow Industrials and the S
Thanks for reading. Read this article as a first step in your due diligence process. It is recommended that you consult a registered and experienced investment advisor before making any transaction.
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Disclosure: I/we do not have any stock, option or derivative positions in any of the corporations discussed, and I do not intend to initiate such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I don’t get any pay for this (other than Seeking Alpha). I have no business dating a company whose stock is discussed in this article.
Additional disclosure: I have a very small weighting on product S