Bear Market Ahead
Some of our most reliable indicators warn that we are headed for a bear market:
Yield curve
The 10-Year/3-Month Yield Differential is plunging towards zero. An inverted yield curve is one of the most reliable indicators of a coming recession but it is always early. A more timely warning is when the inverted yield differential recovers above zero. This is a bull trap as it normally occurs shortly before the start of a recession – when the Fed pauses rate hikes or cuts interest rates as the economy is weakening.
12-Month Rate of Change
Broad market indices, like the S&P 500 and ASX 200, will show a negative rate of change during a bear market. Recovery of 12-month ROC to a positive number is normally an early warning that the bear market is over.
S&P 500
The S&P 500 12-month ROC of -6.03% suggests that the bear market has not ended. Respect of resistance at 4200 would confirm, signaling another test of support at 3700.
ASX 200
The ASX 200 is similarly bearish, with a 12-month ROC of -6.05%. Respect of resistance at 7000 would again confirm, signaling another test of support at 6400.
Key commodities
Crude oil
Brent crude oil broke primary support at $100 per barrel, warning of a strong decline. 50-Day Momentum falling below zero strengthens the bear signal.
Copper
Copper is in a strong-down-trend, having broken primary support at 9000 per tonne. Respect of resistance at 8000, after the recent rally, would warn of another test of support at 7000. 50-Day Momentum well below zero further reinforces the strong bear signal.
Conclusion
Four reliable indicators all warn of a bear market ahead. Investors should be cautious, while short-term traders need to be nimble to take advantage of strong volatility and exercise sound position-sizing to limit potential losses.
Quote for the Week
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
~ Warren Buffett
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Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.
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