The Weekend Edition is pulled from the daily Stansberry Digest.
The recent crash in short-term U.S. Treasury yields could be a sign that interest rates are near a peak...
That's what Brett Eversole shared recently in DailyWealth. The normally slow-moving two-year Treasury yield plunged early last month... falling more than 100 basis points in just three trading days.
Regular Digest readers may remember one reason why this is important...
The inverted yield curve reverting to normal is one of the key indicators I'm tracking in my "bottom is (probably) in" list, which I started sharing in the second half of 2022.
An inverted yield curve is when short-term bonds yield more than long-term bonds. And it's a bad sign for the economy. Late last year, I said I wouldn't be comfortable saying a bottom was in for stocks until short-term yields started to fall relative to longer-term yields.
That's because yields offer a look at general market expectations for growth (and inflation) over different timelines.
We want the yield curve to get back to what it looks like during "good times." If short-term yields can outstrip long-term yields again, it would show that the short-term outlook for inflation and growth is improving.
Out of the five entries on my "market bottom" list, this is one of two remaining holdouts. And the recent action in the Treasury market could soon check it off...
Below is an updated chart of the common benchmark for the yield curve... the spread between 10- and two-year Treasurys.
The recent slide in the two-year yield has started to normalize its relationship to the 10-year yield...
This is significant – and more so if the trend continues.
We'll want to see this spread keep breaking toward positive territory. And it will need to stay above its previous peak around negative 0.4% before we make any proclamations about a new trend.
But it's certainly worth watching over the next few days, weeks, and months. And if the yield curve "reverts," it could help us put the trends we've been tracking since the start of this bear market in the rearview mirror.
Let's quickly review my other "bottom is (probably) in" indicators...
The first is "market breadth." Right now, this metric is in decent shape.
Market breadth is a fancy way of saying the number of stocks in long-term uptrends versus downtrends. You can measure it a few different ways. One method I like involves the 200-day moving average (200-DMA), a simple measure of the long-term trend...
You simply look at the percentage of S&P 500 Index stocks trading above their 200-DMA. It's a quick way to get an idea of market breadth. And today, that percentage is around 50%.
That's slightly below what it has been recently. But it's much higher than its 10%-to-20% range since October – which could end up being the low of the bear market.
Second, the U.S. Dollar Index ("DXY") – even after a recent rally – is still trading below its 200-DMA and 50-day moving average (50-DMA). The latter is a measure of the shorter-term trend.
To me, this means the "strong dollar" trend – driven by the Federal Reserve's interest-rate hikes relative to what other central banks have been doing to fight inflation – is behind us. The story isn't over, but the strong-dollar headwind isn't nearly as strong as it was in the second half of 2021 and last year.
The third indicator is the simplest to track...
The S&P 500 has been trading above its 200-DMA for much of the year. And as of March 29, it broke above its 50-DMA.
This uptrend has continued. It's not in a rip-roaring bullish run yet... But the index reclaimed its long-term average after falling below it amid last month's banking crisis.
That's significant behavior to me.
This brings us back to the yield curve...
While yields reflect bond-market behavior, they're trending in a bullish direction for stocks.
Stocks peaked in January 2022, before the curve inverted two months later. And the opposite may happen – with stocks bottoming before short-term and long-term yields revert – in a broader bottom for stocks.
Most of the time over the past several decades, stocks peaked after the yield curve inverted. But one other time, stocks peaked before the first inversion – similar to what we saw this time around. As I wrote last July...
That just so happened to be the last time inflation was as high and rising significantly as it is now... This year, stocks peaked in January. The yield curve inverted for the first time in March, the same two-month gap as that outlier in 1973.
If the current action in the bond market continues, it would be a strong signal that the worst is likely behind us for stocks. If it doesn't, though, and the yield curve swings back to its downward path, stay alert for more trouble ahead.
In that scenario, you'll also want to look to the other indicators to get a good read on the climate.
My final "bottom is (probably) in" indicator had to do with the market's valuation relative to past and future earnings expectations. In the past, that measure was more of a confirmation of the other four indicators – and the least important in my view.
Today, it's confirming what they're telling us...
The S&P 500's current price-to-earnings ratio of the trailing 12 months is sitting around 18. This is in line with its 12-month forward expectations. That surprised me because of the recent run-up in tech stocks.
But while the small-cap-focused Russell 2000 Index is a bit overvalued relative to the future earnings expectations of Wall Street analysts, the S&P 500 is not. In fact, it's right on point.
"You shouldn't be scared right now"...
Regular Digest readers know all about our friend and Wall Street legend Marc Chaikin. He's the founder of our corporate affiliate Chaikin Analytics.
On March 28, Marc invoked investing legend Warren Buffett's famous advice as he addressed tens of thousands of viewers who tuned in to his latest market briefing. Specifically, he said...
Be fearful when others are greedy, and greedy when others are fearful.
Based on the indicators, that's good advice today...
In Marc's estimation – even amid the recent bank panic (which he predicted more than four months ago, by the way) – now is not a time to be scared to invest in U.S. stocks. In fact, Marc believes folks should be doing the exact opposite.
Marc, a 50-year investing veteran and pioneer, explained that one of the indicators he trusts the most to time the markets just triggered... And it's a rare but notable event that suggests a big shift ahead for the stock market.
The last time Marc saw this signal was at the bottom of the COVID-19 panic in spring 2020. That was just before the benchmark S&P 500 soared 57%.
The time before that was 15 years ago... just before stocks began what became their longest bull run ever.
And the time before that was in 1991 before another long uptrend. You get the picture.
Marc said he wouldn't be surprised to see gains of 20% or more in the S&P 500 over the next 12 months, though not without volatility and pullbacks along the way.
Importantly, Marc has a strategy to take advantage of it. It's one that he first learned back in the 1970s – the last time inflation was as high as it is today (and volatility was as strong, too).
If you missed the event, click here to watch the replay right now.
So all in all...
For the first time since I started tracking my five indicators, I'm comfortable saying that the bottom is probably in.
We'll want to keep tracking yields in the Treasury market. But if recent behavior continues, that's a good sign for the economy and stocks...
Now, this assessment doesn't mean you necessarily need to (or should) go "all in" on stocks right now.
As always, weigh your goals and the risks and rewards of your investments. Then, act accordingly.
But as Marc told his audience, you don't need to be scared right now. We're likely to see a volatile but upward-trending path for stocks in the months ahead. These environments can lead to opportunities...
And if you see a good setup – particularly on shares of high-quality businesses that you love and have growth prospects in any market environment – it could be a great time to buy.
Editor's note: Marc's indicator has only appeared a handful of times since 1950 – and every time, it has predicted the stock market's next move with a 100% success rate. His recent online briefing covers everything you need to know, including how the investing outlook for 2023 has changed... and what Marc believes is the best way to harness what's coming for asymmetric gains. Click here before this story goes offline.