Stock market – is the bear at the door?
“The end game for this bullish phase [on stock markets] needs to be considered well before the event. While the timing is largely guesswork at this stage, the usual causes are not. Bull markets are usually assassinated by tighter monetary policy,” said David Fuller (Fullermoney) from across the pond.
“A good, although not precise, indicator of bear market risk will be provided by the yield curve, currently showing the premium of US 10-year over 2-year government yields. Years often go by before this chart shows anything important but it should not be forgotten by any of us. When this next approaches 0.0, we should have at least trailing stops, mental or actual, for all of our equity long positions. When it inverts to negative, indicating that 2-year rates are higher than 10-year rates, and the longer it stays negative, the more we should assume that a bear market is approaching.
However, one should be cognizant that the yield spread has moderated considerably, to the level where it meets John Hussman’s criterion as one of four measures forming his Recession Warning Composite, already flashing recession concerns.
The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And 2011? With the ROC resting on the zero line, the primary bullish trend remains intact but barely so.
In the short term, I expect equities to not only bounce but also carry higher on an intermediate (two-three month) horizon. However, it is not yet possible to know whether the fat lady of the 30-month bull market has made her appearance. The nature of the rally, especially to what extent up-days are supported by solid volume, would, among others, provide a clue as to whether the cyclical bull is still alive and kicking.
More on this topic (What's this?)
Have the Yield curve and M2 Obscured Reality? (MaxKapital, 9/1/11)
Negative yield curve – further easing ahead? (MarketsPost, 9/8/11)
U.S. Yield Curve Flattening To Prompt Fed Monetary Easing and Gold $1800 (Gold Stocks Today, 8/3/11)