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Three Alarm Bells for a Possible Stock Market Reversal

Reversal stock market, wall street, Etf

Reversal stock market, wall street, EtfThe credit markets are sending a warning signal regarding the financial and economic conditions, but despite the value of the shares, the strategists say that it is not yet time to get rid of the bullish market of Wall Street.

They say, however, that there could be a retreat in what is a very uncertain market, and investors should pay attention to some traditional stress signals that have been shown, such as the sell-off of high-yield debt, which often accompanies the weakening of the shares.

Here we can see the chart of the SPDR Barclays High Yield Bond ETF (Ticker JNK) which refers to high yield bonds.

ETF, JNK, Yeald Bond, stock market

 

As can be seen from the chart, the trend of the ETF is slightly downward in the face of new highs in the US and global stock markets.

 

The Trump effect

In particular, the descent of early November with rather important volumes had aroused more than one thought, interrupted only by good news on the Fiscal Compact front put up by Donald Trump in the United States.

Donald Trump's Fiscal Compact approved last Saturday deserves special attention for several reasons.

I recall that Trump leads the nation that most can influence global stock markets, and this should be enough. If we also add that he has undoubtedly a rather volcanic and unpredictable character it is easy to understand nervousness.

Be that as it may, the Fiscal Compact was particularly crucial because Trump could lose face on his mandate, as other points that characterised his electoral program did not go in the right way. Above all, the abolition of Obamacare, the reform of the US health system strongly desired by former President Barack Obama.

 

Other alarm bells

Another element that creates nervousness in stock markets is the flattening of 10-year US Treasury bond yields against 2-year yields. In fact, the 2-year yield increased over 38% to 1.75% while the 10-year yield decreased by 10% to 2.3%.

This aspect is important because the flattening of the curve, at times, is interpreted as an alert signal that announces a weakening of the economy. It is not seen as a real problem until the curve reverses, which is historically a sign of recession.

To date, the stock market has increased by a bit more than 18% since the beginning of the year while the bond market is only 3%. Most likely, some big investors are looking at these numbers, and they may think to rebalance their portfolio.

The last element that could create destabilisation instead refers to Chinese bond yields. Among other things, the previous market reversal took place in conjunction with problems related to the Chinese debt. However, in China, the yield curve of short-term bonds with long-term bonds is already reversing, so maximum attention must be paid to investments.

 

The transport sector

With this article, I absolutely do not want to terrorise anyone, also because at the moment the situation is undoubtedly positive. If we look at transport, the first thermometer of a possible economic downturn, we can see that they indicate great health.

I use another ETF, the iShares Transportation Average ETF (ticker: IYT) which usually anticipates the future movement of American stock indices (I have shown this in some previous articles). As clearly you can see in the chart below, the ETF is, as the S&P 500, at its highest.

ETF, IYT, Transport, stock market

 

In conclusion, we always work on what we see, therefore an upward market. But we do not underestimate the alarm bells that are ringing around us.

Personally, as a good trader, I am increasingly diversifying regarding investments and operation in such a way as to defend the profits obtained in the last years in 2018. My advice is to deepen the knowledge also on Commodities spread trading, Forex and other markets to avoid being overexposed towards the stock markets.

 

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