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Yield curve inversion nerves

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The wild swings continue after yesterday's 800-point drubbing in the Dow, reversing and doubling the loss of Monday's 400-point gain. They're blaming a brief inversion of the 2 / 10 year bond yields yesterday morning, but if you've been reading our commentary, it's hard to believe that anyone was surprised by that happening. It has been getting dangerously close for a while.

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The 2 and 10 year yield spread inverted early on Monday, then later closed 1-basis point above inverted. Of course the hubbub is all about an inversion being a meaningful indication of a recession in the not to distant future.

Between the yield curve inversion, the ongoing trade war, the protests in Hong Kong and China getting involved, economic issues in Italy, and also Argentina, and even nuclear armed India and Pakistan are going at it these days, no wonder the market is finally reacting. It's never completely quiet out there but that's quite a bundle of economic concerns here.

The Fed was raising rates in late 2018 and the market didn't like that. They backed off to start 2019 and stocks took off again, but while stocks were rallying, the bond market began to tell us that something was wrong. Yields were falling. The 3-month and 10 year bonds inverted back in May. Stocks sold off in May, then bounced right back with the help of the Fed who was now talking about lowering rates. The 2 and 10 year yields inverted for the first time this morning and the market woke up again with some panic.

That's where we are now and it may take a Fed cut to change direction again, unless a deal is made with China, which could also help as we saw on Monday.

The Fear Of Missing Out (FOMO) phenomenon is real because of the market's ability to get a big jolt by a tweet or headline at any given time. We've seen it over and over, and that may be what has kept this market from selling off more significantly, although the 200-day average on the S&P 500 helped. Can you imagine what kind of rally we'd get if the Fed does make a preemptive strike and cut rates before the September meeting because of this market action? That is a possibility, and I'm sure President Trump won't be shy about taking the opportunity to strongly suggest this via a tweet, especially when stock prices are falling.

Bottom line, the writing has been on the wall for a while but the bulls have been relentless this year. Perhaps now they will have to pay the price because as of now, we're really not that far off all-time highs. When it gets bad, it seems to get worse than you'd think. But if there's a positive catalyst,
the FOMO and algorithm trading just buy the heck out of the dips. If that happens it could just be a relief rally, we don't know. The indicators will help when it happens. That's where we are, and it won't be easy picking a bottom unless it is one of those Fed moves or trade tweets.

The one time bellwether stock Cisco reported earnings after the bell yesterday and was down 7% in after hours trading. It's probably going less noticed than if it happened on a quiet day, with the other news and melt-down in many stocks.

At a time like this, less may be more and we want to keep it simple if we can, so let's make this quick today. Although we did see some of the other charts actually breaking down, I think the S&P 500 chart will suffice as repeating the story that we've been talking about for a while now. If we go into fundamentals, readers of our commentary know that the "MAPE" (margin adjusted price to earnings ratio) suggests stock prices are historically overvalued, so we can't rule out a major decline being in the works. But we'll take it day by day.

Although nothing would surprise us at this point, be wary of any positive open today.

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The S&P 500 (C-fund) fell to the 200-day EMA with a thud yesterday, closing right on the lows and just below the average. For those who don't know, and I was asked about this yesterday, the EMA stands for the Exponential Moving Average. That means more recent action weighs more heavy on the moving average calculation, as opposed to the SMA (Simple Moving Average) which just adds up the prior 200 closing prices and divides the total by 200.

The early August lows were near 2850, and then the June 3 low was down by 2730.

The 20-month S&P 5000 chart shows the longer-term rising trading channel. The 200-day EMA may hold, otherwise there's that void down to the bottom of that channel near 2750. Of course there's no law that says that must hold, as we saw in December, but that brutal action, once the bleeding stops, can snap back very quickly and be tough to catch.

AGG (Bonds / F-fund) was up nicely as yields continued to slip to new lows. It's now back above that channel which could either mean it's extended and due for a pullback, or things are getting bad enough to change the angle of incline for bond prices.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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AGG (F Fund) (delayed)

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