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The yield curve has a strong record of indicating when a bear market is approaching. When the yield on a 10-year Treasury bond is more than 56 basis points lower than the yield on a 1-year Treasury bill it signals a bear market, especially when the difference turns negative i.e. the yield curve inverts. This relationship has been the strongest since 1995 with a lead time of 121 weeks.
This correlation worked well in predicting bear markets starting in 2001 and 2007. This yield curve suggested that a bear market would begin in late 2020. As I see it, the pandemic triggered some of the bear market nearly eight months ahead of schedule and the massive monetary and fiscal response pushed the rest of the bear market back nearly a year behind schedule.
The blue line at zero in the chart above means that the average daily close for the week is the highest average of the last 78 weeks (18 months). The blue line shows what percentage the week is below the previous 78-week high.
As stated in previous articles, I expect the (SP500) to reach an 18-month high this year and an all-time high in 2024. The average of daily closing prices for the week of July 26 was 4561.7, down only 0.2% from the 18-month. High. The next time the S&P 500 reaches or exceeds that level, it will be its highest level in 18 months.
The current inversion of the yield curve is the largest since the early 1980s. I expect this means that a massive bear market will begin next fall. The irony is that a bear market and recession will not begin until the yield curve becomes positive or at least very close to positive.
The stock market does not go up or down in a straight line. Excessive up or down is followed by a move in the opposite direction. The green line in the chart below shows the percentile rank for the combined returns of a 12.5 trading-day period and a 25 trading-day period. The percentile rank on Thursday 5 October was 6.7%. Had the market closed lower on the morning of Friday, October 6, the rank would have been less than 5%. Friday and Monday’s rally has pushed the percentile (green line) up to 18%. This is still a weaker return than 82% of the time. There is a lot of scope for upward movement in the market.
Looking back, the correction started from a high point, July 25, when the percentage for the long return period shown in the red line was 96.3%; The percentile for the short term was 87.7%. Such high percentages were not sustainable for the return period.
The next five charts show the fit of sine waves to fluctuations over trading-day periods of 200, 100, 50, 25, and 12.5 days.
The appropriate sine wave for the 200 trading-day period shows that 12/01/2023-09/18/2024 will be the best 200-day period in the current cycle. This September 18 cycle is just a few weeks away from the higher yield curve indicating a bullish peak in the first week of October.
The sine wave for the 100 trading-day period suggests that the best hundred day period in the next cycle will be 04/30/2024-09/20/2024. This cycle high is a few days from the 200 trading-day period.
The 50 trading-day period chart shows that we have started a strong uptrend and another bull market correction will occur in the spring or summer of 2024. The best 50 day period after the correction, not yet shown on the charts, is currently indicated for 05/20/2024—10/10/2024.
The yield curve and the three cycles above are consistent with the bull market peaking in September or October 2024.
The sine waves fitted to the 25 and 12.5 trading-day periods also suggest that the correction is over and the bull market has resumed.
It’s time to ride the bull.