Authored by Sven Henrich via NorthmanTrader.com,
By now you’ve probably read a gazillion opinions on the inverted yield curve and seen a ton of analogs being discussed. On the yield front the general bullish consensus seems to suggest to simply ignore it. Like everything else. On the analog front I see references to examples such as 2016 (the earnings recession will be temporary) and 1994 (the yield inversion is a fake out and it won’t matter) and similar. The general consensus: Ignore the inverted yield curve, buy stocks.
My position remains: More open-mindedness and less certitude. How can anyone actually know what is to be ignored and what isn’t?
I suppose if the argument is simply that central banks are dovish and that is good enough then perhaps that is good enough:
No ECB rate hike in 2019.
— Downtown Josh Brown (@ReformedBroker) March 27, 2019
Probably no rate hike here either, and a coin flip for a rate CUT.
China is stimulating like crazy.
Japan is Japan.
Brexit is a 2025 story.
You want to be out?
And perhaps it is. I don’t know. It’s worked for 10 years, maybe it will work again.
Maybe central banks can once again render all negatives moot. Yet there are a lot of issues to be mindful of and I listed some of these in Chasing Reality and The Reckoning. The macro wheels are turning.
So an inverted yield curve is bullish and you should buy every dip? Let me at least test this theory by looking at a case a lot less mentioned.
Last year I mentioned the 2000/2001 case quite a bit (see also Imbalance).
What was so interesting about 2000/2001? We had a blow-off top move in tech, markets made a major top, there were multiple 10% moves and an increase in volatility and then something unique happened: A yearly low in December. Sound familiar? It should as the ghost of 2001 is making appearances all over this market.
Back then I said, following this analog, we could see a multi-week rally emerge from the December lows and it did. This one here going even farther than back in 2001.
Let me say upfront here, I’m always cautious with analogs because no situation, economy or market is the same and things always change, hence nothing is like for like.
But in light of the similarities and the now found certitude that an inverted yield curve is something to ignore let’s take a quick peak here how conducive that yield curve inversion then was to buying stocks.
Here’s the current situation:
We had a blast off in January 2018 followed by a 10% correction, a top in September, followed by a 20% correction and now a 21% rally for a, currently, lower high,...