$8 Trillion

Global bond yielding less than zero (yes, that means lenders are paying the Government to let them hold their paper) now exceed 8 Trillion dollars. In total, there are 18 countries with negative bond yields ... in the 10th year of one of the largest global economic expansions no less.

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Central banks only tool left in their toolbox in an attempt to counter slow or negative growth is to stimulate the economy by lowering interest rates. At some point all that want to borrow have done so and keeping rates so low harm only those who require bond income (retirees). With this going on since the 2008-09 crash and not having the desired effect one has to wonder why continue and then immediately brings to mind this quote

The definition of insanity is doing the same thing over and over again, but expecting different results – Albert Einstein

You need to look no further than the chart above to the reason why I am a firm believer Europe is winning the race …… to the bottom and the next economic crisis will begin from that region of the world.

Q1 2019 Charts on the Move Video

Impressive moves from Christmas eve lows have the worlds stock markets very extended.. Typcially, prior highs act as formidable resistance, will they again? Or, will this be the mother of all rallies that ignore those levels and slice right through? Something to ponder as you listen to my most recent charts on the move video.

Inversion Update

In June of last year, I wrote about how the US treasury yield curve was getting close to inverting and how that has historically been an accurate predictor of future recessions. Why it matters to investors is because a recession usually brings falling stock, commodity and asset prices (not all, but most risk assets), something we would prefer to avoid (as much as possible of). Obviously any prewarning we could get would be a bonus and allow to prepare for a high probability slide in risk asset prices. As history has shown, a yield curve inversion tends to precede recessions, unfortunately it doesn’t happen immediately nor consistently, varying from a period from 6 months to two years after the curve flips negative that the recession hits. At the same time yields invert, the stock market tends to continue its climb higher from the day of the inversion until it eventually hits its cycle peak. The timing of that stock market peak varies widely. All we know is stocks eventually peak and then fall. So, in summary, investors will get an early warning of a recession but won’t actually fall into a recession (if at all) until some point in the future which we, of course don’t know when it will occur. Add to that fact we won’t find out we are in a recession until after the fact and even if we do, the stock market won’t care …. until it does. Do I have that right? Ok, so much for the part about being prepared.

The reason I am resurrecting this topic is because, for a brief instance during last Friday’s session, the yield curve flipped negative. The good news, it closed 3 cents above the inversion level, the bad news, in my opinion, it is just delaying the inevitable. All facetiousness aside, investors would be wise to keep a close eye on the yield curve going forward. An actual inverted close and hold would be a time that investors should consider lightening up on risk asset exposure (that is unless the potential for a large drawdown is acceptable and you have time to make it back) and/or make sure you have an exit plan.

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The good news is historically there has been ample time to make preparations if investors wanted to do so once the curve inverts. The bad news is, no one rings a bell and sometimes you take an early exit. I need to reiterate as of now we do NOT have an inverted yield curve so I may be nothing more than the boy crying wolf. But when you add this potential to the fact we are into the longest expansion without a recession ever in history, feel free to ignore the warning signs at your own risk.

Your Turn

Those long-term followers know I use ratio charts as a part of my process, mostly to help determine where best to allocate investment capital. As with investment prices, trends persist when it comes to outperformance (ratios). The chart below I call “Risk On” is a ratio of the US SP500 stock index performance to US 30-year treasury bonds and its message helps define current risk levels. If the ratio is rising, risk is low and you have achieved (and will likely continue due to trend persistence) the best return by investing in US stocks only. If the ratio is falling, risk is elevated and bonds are out-performing.

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With a quick glance, what should be immediately noticeable is the ratio broke below its rising uptrend support line in November of last year. This occurred at the same time when RSI momentum (upper pane) diverged (both short term and longer term) with the ratio warning of an increase in risk and possible trend change. From that point the ratio was crushed with the strong year-end selloff in stocks.

With stocks rebounding strongly from their massively oversold condition the ratio has, as you would expect, mirrored its move higher. Uninspiringly, the ratio closed out yesterday still below its falling 200-day moving average and has yet to make its first higher low. Looking left we see that the ratio is about the same place it was 12 months ago telling us that stocks and bonds have had a comparative return. Now what?

Closing out this post right here intentionally not providing a summarization or point to the post, I am wondering how you would interpret the charts message? Pile in to stocks gunz a blazin’? Stay on the sidelines in the safety of bonds and let the dust settle? or something in between?  I’d love to hear your thoughts and opinions.

Maybe This Year

On Jan 2, 2018 I walked into Melanie’s office and told her I had set a goal for myself to see if I could double my small, trading account IRA account in one year (achieve a 100% return).  An ambitious goal but something that is doable with good risk management, some leverage, active trading and of course must include a dash of luck and a cooperative market.

With 2018 now in the rearview mirror and a tally of the results I have to come clean, I did not achieve my goal. In fact, I was far below it. Disappointing no doubt as at one point in the year I was up more than 70% with about 40% of the year left to go I thought it was going to be a slam dunk. I had it all mapped out, I was going to sell everything once I hit that 100% mark and sit in cash and wait for December 31. But, alas, Q4 happened. I didn’t react fast enough to the rapid change in sentiment and so I fell hard with the market. Deal with it big boy, the market is talking and doesn’t care what I want or think. Oh yah, the “Woulda-Shoulda-Coulda” game is a waste of emotional and brain capital too so don’t do it. Its non-productive. If you don’t like the results, change your process.

My return for the year was 25.7%, not bad as I outperformed the SP500 by almost 32%. But those that know me understand “not bad” is not what drives me. So, being the uber competitive individual I am, I will, once again, set another goal to double my account for 2019. The odds are I will fail even worse than I did this year. Why? Because I am human. 2018 provided me the opportunity to fly under the radar with only one person knowing my goal. No external pressure or embarrassment if I failed, just my pride was at stake. You see the sad thing is as humans we have a tendency to act differently the more sets of eyes that are scrutinizing what we do, especially when money is involved. Even though I have the same set of trading rules, because of emotions that drive decisions, I am more than likely going deviate from them even though I know I should not***. Hopefully my genetic stubbornness, adjustments to my process and most importantly my real goal for doing this can keep my emotions in check. I want to make it clear, if I achieve the goal it’s not because I want to gloat or brag, or even because I want a bigger IRA (although I don’t mind this), instead I have something that is way more important to me. I want all clients and readers to know beating the market (and hopefully substantially) is doable in spite of Wall Street’s mantra it’s not possible. If Wall Street is too dumb (and this has nothing to do with intelligence) or lazy, that doesn’t mean it’s not possible. Peter Brandt taught me this and it changed my life. My goal is to do that same for some of you.

Let’s be real. Can beating the market be done every year?  Nope, not going to likely ever happen every year over a long run by anyone let alone me. All of my mentors and people I follow and compare methodologies and processes with do it regularly, but not every year. Each of them has experienced underperforming years, some terribly so. That is going to occur with random markets, it’s inevitable. And what is a common trait is that those individuals become better when they fail. They key-in on and learn from their mistakes/failures, something all of us should do if we want to get better at anything in life. They are also in a continuous loop, never staying idle or complacent but always improving. To be a successful investor all that is required is 1) have a process that provides positive expectancy 2) insure steadfast discipline following the process, 3) access to multiple markets to invest in (more than just stocks and bonds) and 4) an unwavering desire to outperform (a politically correct way of saying being an overly competitive pain-in-the-^%$.

Maybe this year.

Any doubters feel free to email me as I will be more than happy to provide a validation of trades and account values. And no, in case you were going to ask as others already have, I can’t do this for anyone else’s account.  Sorry. On the other hand, if you would like to learn how, please send me an email as I’d love to share with anyone what I have learned (what’s the old Chinese proverb about teaching a man to fish?).

***If you want to learn more about this human trait, there is a really interesting and true investment story you can read, just google the “turtle traders” or email me and I can send you an ebook.