by Ian Harvey
August 29, 2019
The bull rally
continues to endure despite all the “Chicken Littles”
running through Wall Street yelling “Doom, Doom, Doom.”
Admittedly, there are plenty of factors that provide ammunition for these “doomsayers,” such as…..
But, I feel that there is still plenty of petrol-in-the-tank to see the bull rally continue, even taking into account the factors above. Even if the inversion of the yield curve, which is, historically, a pre-cursor to a recession, proves true; this does not necessarily mean the “recession” that people are “fearing,” such as witnessed in the 2008 financial crisis, will eventuate.
What is the Effect of the Inverted Yield Curve?
This has been the longest period of time in the history of the stock market for the bull rally to continue, taking into account several hiccups along the way. Let us first understand what an inverted yield curve means?
An inverted yield curve means that short-term interest rates are higher than longer-term ones. The inverted yield curve is what happens when investors are bidding for longer-term bonds -- thus driving down their yields -- because they are pessimistic about the short-term prospects for the economy.
Historically, as already mentioned, the yield curve inversion is a sign that the bull rally is coming to an end; but how long before that end is reached is the question!
One point rarely mentioned is that after the yield curve inverts, the stock market invariably continues to go up for varying periods of time. Looking back to previous instances as examples of this…..
1. The 2001 recession saw the yield curve first inverted in June 1998, two years before the start of the recession. The S&P 500 rallied nearly 40% before tapering off going into the 2001 recession.
2. And again, for the recession that officially started in December 2007, the yield curve first inverted in February 2006, roughly 22 months prior. The S&P 500 rallied more than 20% after the yield curve first inverted.
Therefore, based on history, it is expected that the bull rally continues for some time yet. The bear market has reared its ugly head a couple of times since the last recession but has not been able to manage fruition – that is, the theoretical threshold of 20%.
Bear Market Attempts…..
1. The first time was in 2011 when the stock market fell 19.4% before correction, and
2. The second attempt was between the end of September and December last year, 2018, when the market slumped 19.8% - close, but not close enough!
What Can You Do?
I believe there is still plenty of upward movement in the stock market, with lots of volatility thrown in - the bull rally continues – as there are still plenty of driving factors such as better-than-expected earnings reported in sectors that help drive the economy, the trade tensions may ease and eventually be worked out, the Fed’s recent rate cut will help the housing market, world conflicts become less and the economy will continue to be okay. Obviously, there is always the unforeseen situation where a “black swan” raises its feathers, but for now there are still plenty of positives to profit from going forward.
So for Stock Options Made Easy, and its members, we tend to play our own game, not to be “sheep-to-the-slaughter”, and continue to profit!To get more investment insight like this and profitable trades in real time, join us at Stock Options Made Easy today!