A Warning from the Past...

Summary

In this stock market analysis, the presenter discusses the steepening of the university yield curve and its historical correlation with market volatility and recessions. They highlight the inverted 10-year, 3-month yield curve, which has historically preceded economic downturns. The video also reviews the performance of the S&P 500 sectors, suggesting early signs of economic contraction. The presenter examines historical instances of the 3-month yield surpassing long-term yields and their impact on commodities like oil and copper, noting similar patterns emerging. They conclude with trading insights, focusing on key support levels and the importance of monitoring market indicators for potential shifts.

Takeaways

• 📈 The stock market has been experiencing volatility, with the yield curve steepening and potentially signaling economic shifts.
• 📉 The 10-year and 3-month yield curve remains inverted, which historically has been associated with economic recessions.
• 🔍 The presenter highlights the importance of monitoring the 3-month yield, which closely tracks the federal funds rate, for economic indicators.
• 🏢 Sector performance in the S&P 500 shows strength in real estate, utilities, and consumer staples, suggesting a potential early sign of economic contraction.
• 📊 The presenter reviews historical data, noting that when the 3-month yield was above the 10, 20, and 30-year yields for extended periods, it preceded market turbulence and recessions.
• ⏳ The script discusses the upcoming Federal Reserve rate decision, with market expectations shifting towards a 50 basis point cut rather than a 25 basis point cut.
• 📉 Commodity prices, particularly oil and copper, have shown significant drops recently, which historically have coincided with economic downturns.
• 📊 The presenter analyzes various market indices, noting that they are currently above their short-term moving averages, indicating a positive short-term trend.
• 📍 Key support and resistance levels are identified for the S&P 500 and other indices, which will be crucial for market direction in the coming sessions.
• 🔎 The presenter emphasizes the importance of monitoring economic commodities and yield curves for signs of potential market movements and economic shifts.

Q & A

What is the significance of the university yield curve in the stock market?

The university yield curve is significant in the stock market as it has historically been an indicator of economic conditions. Its steepening and inversion have been linked to increased market volatility and have sometimes preceded recessions.

What does the 10-year 3-month yield curve indicate about the economy?

The 10-year 3-month yield curve, also known as the fed staple yield curve, is an economic indicator that reflects the difference in yields between 10-year and 3-month U.S. Treasury securities. An inversion of this curve can signal potential economic slowdowns or recessions.

How does the speaker analyze the stock market sectors' performance in relation to the S&P 500?

The speaker analyzes the performance of the 11 sectors that make up the S&P 500, noting which sectors are in the green and how they align with the stock market cycle and economic cycle. This analysis helps to identify potential shifts in market trends and economic conditions.

What does the speaker find interesting about the longer-term chart of the 10-year 3-month yield curve?

The speaker finds it interesting that the 10-year 3-month yield curve is still inverted despite the overall market being at highs. This observation is significant because historical data shows that such inversions have often preceded economic downturns.

What historical patterns does the speaker observe regarding the 3-month yield and its relation to economic recessions?

The speaker observes that during periods of economic recessions, such as in 2000-2001 and 2007-2008, the 3-month yield has been above the 10-year, 20-year, and 30-year yields for several months. This pattern suggests that prolonged inversions of the 3-month yield relative to longer-term yields may precede economic downturns.

How does the speaker use economic commodities like oil and copper to support their analysis?

The speaker uses the performance of economic commodities like oil and copper to support their analysis by noting significant price drops in these commodities prior to rate cuts and economic downturns. These drops are seen as potential indicators of economic stress.

What is the speaker's stance on trading during periods of market uncertainty?

The speaker suggests a cautious approach to trading during periods of market uncertainty, focusing on key support and resistance levels, and being prepared for potential market movements based on historical patterns and current economic indicators.

What technical analysis tools does the speaker use to evaluate the market's short-term trends?

The speaker uses technical analysis tools such as the 5-day moving average on an intraday time frame and the month-to-date anchored volume-weighted average price to evaluate the market's short-term trends and to identify potential entry and exit points for trades.

How does the speaker interpret the gamma structure in the context of market volatility?

The speaker interprets the gamma structure as an indicator of market volatility. Being in positive gamma territory suggests that dealers are more likely to buy the dip and sell the rip, which can suppress volatility. Key levels identified from the gamma structure are used to gauge market sentiment and potential price movements.

What are the key levels the speaker suggests to monitor for potential market movements?

The speaker suggests monitoring key levels such as 5600 and 5650 for the S&P 500 index, as these levels have been significant in past market movements and can provide insight into potential future trends.

Outlines

00:00

📈 Stock Market Brief: Yield Curve Analysis

The speaker begins by sharing an observation on the stock market, focusing on the university year yield curve which has been steepening and historically associated with market volatility and recessions. They highlight the inverted 10-year 3-month yield curve, which is a significant indicator. The discussion transitions to the broader market, noting that most sectors of the S&P 500 are in the green, except for consumer discretionary. The speaker also delves into the stock market cycle, economic cycle, and sector performance, suggesting early signs of an economic contraction period. They conclude by reiterating the importance of the 3-month yield and its historical impact on market volatility and recessions.

05:01

📉 Historical Yield Curve Trends and Market Reactions

This paragraph delves into the historical behavior of the 3-month yield curve in relation to economic recessions. The speaker examines past instances where the 3-month yield was above the 10-year, 20-year, and 30-year yields, notably in 2006-2007 and 2000-2001. They correlate these periods with significant market volatility and economic downturns, including the financial crisis. The discussion also includes the performance of economic commodities like oil and copper during these times, showing significant drops that coincided with market instability. The speaker emphasizes the potential implications of these historical patterns for current market conditions, suggesting that similar trends might be emerging.

10:03

🔍 Analyzing Market Indicators and Potential Outcomes

The speaker continues to analyze market indicators, focusing on the current status of the 3-month yield and its proximity to the federal funds rate. They note the recent drop in yields and the market's reaction, which includes a potential rate cut. The discussion also includes the performance of economic commodities like oil and copper, which have seen significant drops similar to past market stress periods. The speaker speculates on the market's potential response to these indicators, considering both bullish and bearish scenarios. They also discuss the market's pricing in of rate cuts and the impact of political pressures on the Federal Reserve's decisions. The paragraph concludes with a focus on trading strategies and the importance of monitoring key market levels.

15:04

📊 Technical Analysis and Market Sentiment

In this final paragraph, the speaker shifts to a more technical analysis of the market, discussing specific levels and patterns that could influence trading decisions. They mention the importance of being above certain levels for a bullish outlook and caution below these levels. The discussion includes the gamma structure of the market, which influences volatility and trading behavior. The speaker also provides specific price levels for the S&P 500 (Spy) and other indices, suggesting how market participants might react to these levels. The summary concludes with a focus on the importance of monitoring short-term price movements and adjusting trading strategies accordingly.

Keywords

💡Yield Curve

The yield curve is a graphical representation of the interest rates, or yields, on debt for a range of maturities. In the video, the presenter discusses the 'university year yield curve' and its steepening, which historically has been associated with market volatility and recessions. The presenter also focuses on the 'fed staple yield curve', specifically the 10-year and 3-month yield curve, which is still inverted. This inversion is seen as a potential indicator of future economic conditions.

💡Inversion

Inversion in the context of the yield curve refers to a situation where short-term interest rates are higher than long-term rates. This is typically considered unusual as investors usually expect higher returns for tying up their money for longer periods. The video discusses the inversion of the 10-year and 3-month yield curve, which has historically preceded economic downturns.

💡Volatility

Volatility in financial markets refers to the degree of variation in the prices of securities over time. The video script mentions that the steepening yield curve has historically led to increased volatility, which can result in significant price swings and potential market instability.

💡Recession

A recession is a significant decline in economic activity that lasts more than a few months, typically visible in real GDP, income, employment, and industrial production. The video discusses the historical correlation between the yield curve inversion and the onset of recessions.

💡S&P 500

The S&P 500, or Standard & Poor's 500, is a stock market index that tracks the performance of 500 large companies listed on stock exchanges in the United States. It is often used as a gauge of the U.S. equities market. The video mentions the 11 sectors that make up the S&P 500 and their performance, which is indicative of market sentiment.

💡Consumer Discretionary

Consumer discretionary refers to a sector of the economy that consists of non-essential goods and services. In the video, the presenter notes that the consumer discretionary sector (XLK) was not in the green, meaning it did not perform as well as other sectors on that day.

💡Stock Market Cycle

The stock market cycle refers to the recurring pattern of economic activity in the stock market, which includes periods of expansion and contraction. The video discusses the stock market cycle in relation to economic cycles and sector performance, suggesting that the market may be moving into a period of potential economic contraction.

💡Federal Funds Rate

The federal funds rate is the interest rate at which depository institutions lend balances to other banks overnight. It is the primary tool used by the Federal Reserve to manage monetary policy. The video script discusses the three-month yield, which tracks the federal funds rate, and its inversion from the 10-year, 20-year, and 30-year yields.

💡Commodity

In the financial context, commodities refer to basic goods used in commerce that are interchangeable with other goods of the same type. The video mentions economic commodities like oil and copper, which are often used as indicators of economic health. The presenter notes significant price drops in these commodities prior to past rate cuts, suggesting potential economic concerns.

💡Rate Cut

A rate cut refers to a reduction in the interest rates set by a country's central bank. The video discusses the timing of past rate cuts and their correlation with economic indicators, such as the movement of the three-month yield and the performance of economic commodities.

💡Gamma

In finance, gamma is a measure of the rate of change in an option's delta with respect to changes in the price of the underlying asset. The video mentions gamma in the context of options trading, discussing how the gamma structure can influence market volatility and trading strategies.

Highlights

The university yield curve has been steepening, historically associated with market volatility and recessions.

The 10-year 3-month yield curve is still inverted, which is an interesting observation for market analysts.

The S&P 500 sectors show a mixed performance with most in the green, indicating a risk-on market sentiment.

Real estate, utilities, and consumer staples sectors hit new year-to-date highs, suggesting a potential economic contraction phase.

The 10-year 2-year yield curve has un-inverted and is steepening, which historically has led to market volatility.

The three-month yield, which tracks the federal funds rate, has been inverted from the 10-year, 20-year, and 30-year for an extended period.

Historical analysis shows that when the three-month yield was above the long-term yields for multiple months, it preceded economic downturns.

In 2007, the three-month yield was above the 10-year, 20-year, and 30-year for about eight months before the financial crisis.

Economic commodities like oil and copper showed significant drops leading up to rate cuts, indicating potential market stress.

The market's reaction to the yield curve inversion and rate cuts has varied, with periods of sideways movement observed.

The speaker emphasizes the importance of looking for bullish cases even in potentially bearish scenarios.

The S&P 500 (SPY) and the NASDAQ (Q's) are in different technical patterns, with the SPY showing a potential cup and handle formation.

The semiconductor index (XBI) and the Dow Jones Industrial Average are above their short-term moving averages, indicating a bullish short-term trend.

Key support levels for the SPY and other indices are identified, which could be crucial for market direction in the short term.

Gamma analysis shows a big contract roll is taking place, which could influence market volatility and price action.

The speaker discusses the potential for a measured move in the Q's index, suggesting a break out could lead to new highs.

The market's reaction to the yield curve and rate cuts is complex, and the speaker advises caution and careful analysis of economic commodities.

Transcripts

so I noticed something pretty

interesting today that I want to share

with everyone on today's stock market

brief show a lot of people have been

talking about the

uninversity year yield curve and they're

absolutely right it has been steepening

and going up and looking back through

history it has cost some volatility and

even led into some recessions but more

importantly I want to talk about

something that I found interesting about

that fed staple yield curve which is the

10year 3 month as you can see currently

the 10year 3mon is still well inverted

but I did notice something very

interesting on this longer term chart

and that's what I want to talk about on

today's stock market brief show so we're

going to go ahead and get right into

[Music]

that all right everybody welcome back to

the show before we hop right into that

specific chart and then dig into the

history of that chart and then we'll

also obviously walk through what it is

that I'm doing what I'm looking at from

a shorter term perspective let's take a

look at the 11 sectors that make up the

S&P 500 almost everything was in the grp

green today other than consumer

discretionary in xlk so these are the

risk on assets these were the sectors

towards the bottom it's just one day

right we have a contract rooll going on

we got macro data coming out so it is

what it is there but I did find

something interesting once again looking

at this cycle chart where we're looking

at the orange which is the stock market

cycle the blue is the economic cycle and

then you have the 11 sectors that

typically perform and let you where we

stand well today we hit another

year-to-date high in real estate

utilities consumer staples even out

there in Industrials uh I think that

that was it but yeah we're starting to

see continu just strength Within These

sectors that are kind of telling us that

yeah yeah we're kind of coming from the

stock market top area but we're now kind

of moving into the potential the early

signs right of of the economic

contraction period or starts to turn

down where we go into early recession

and if you just look at the last three

months performance right you have xlre

right here you have utilities financials

Consumer Staples right right over here

you have Consumer Staples utilities

financials real estate so we're we are

seeing this cycle thing progress out and

on a prior video we talked about what to

look for as far as strength if we do go

in through an economic recession well

typically you start getting strength

later down the road there in technology

consumer discretionary and so forth so

we got to be prepared for that type of

situation to potentially play out now

back to what I was talking about here on

the yield curve stuff so the 10-year

2-year did un invert we're current ly

unadvertised and steepening un inverting

steepening and you can see it led to

volatility in the markets pandemic

actually went higher and then the

pandemic came so who knows what would

have happened there after they used QE

Infinity uh but now what I want to kind

of focus attention on is something that

I found interesting and that was that

three-month yield right the three-month

yield for those that don't know this one

tracks the federal funds rate so the in

the shade shaded black that is the

federal funds rate and the pink line is

the three month uh and a lot of people

look at the 2-year and the federal funds

rate that's totally fine too I just

wanted to call this out because looking

back through history I was like thinking

to myself I'm like wow the it's way up

here it's been up here basically

inverting from the the 10 year the 20

year and the 30-year for quite some time

and I looked back at 2020 I was like did

it did it invert did it invert all these

curves here too as well and the answer

is is no actually maybe maybe very

quickly over here I'd have to check in a

little bit it doesn't look like it did

though okay but where was the areas that

it did completely overtake the 10 the 20

year and the 30-y year the 3 Monon well

you can see over here in 2006 and 2007

and then right over here too as well in

2000 and then a couple of times back

further which I'll get into but let's

zoom in more specifically to this area

right over here so if I zoom in right

here this is pretty cool this is back to

2007 going into 2008 you can see right

here is that time that we highlighted

where the pink line which is the 3mon

was above the 10 year the 20 year and

the 30-year and it happened to be above

it for roughly from

one 2 3 4 5 6 7 8 eight eight months or

so the black line is when they all

uninverted which is roughly about June

of 2007 and then our first rate cut from

the cycle of rate Cuts happened to be

September 18th too as well isn't that

kind of funny so we're going into our

first rate cut this cycle at September

18th and in 20072 2008 happened to be

that same way but what what was the

market doing in that time well when it

first when they all uninverted the 3mon

uninverted from all the the 10 20 to 30

what you'll see here is that the market

saw some volatility it went up and then

it went through the financial crisis

during that same time there was a couple

economic assets so we like to talk about

intermarket analysis and look at various

economic Commodities that weigh not only

on the US but also the global

perspective as well and here during that

same period of time when we went through

the rate cut so the First Rate cut was

September 18th is I'm remember right

around there okay um which is labeled on

the chart right now I think I just put

it at September but what was oil doing

in that time leading up to the First

Rate cut well it dropped 20% okay what

was copper doing which is pretty intense

volatility in a period of two short

months and yeah it's been on a monster

run up over here but that big snap right

that that these type of things these

type of moves can cause concerns and

then copper was also kind of just going

sideways chopping around but from its

most recent Peak to when we we started

cutting rates it was down maybe maybe a

little bit more than 18% if I went to

September 18th specifically but it was

about

18% okay so let's go a little bit

further back and go to 2000 2001 2002

which is the do bubble bursting well

over here you can see that the yield

curve or the yield the three-month yield

was above it for one two three months

maybe a little bit more if you count

this but it's kind of in and out so four

or five months right around there and

then we went through a rate cut at the

beginning of 2001 and at the black line

resembles when the 3month fell

underneath back underneath so these all

these yield curves uninverted which is

the the 10

2030 and what happened to the market

well the market started seeing much more

volatility and so forth what was those

econ Eon e economic commodities doing so

crude oil and copper well leading up to

that rate cut oil fell 26.9% in a very

short period of time copper in the same

short period of time from its recent

Peak over here fell about roughly

133% now we can go back a little bit

further so I looked at the 8990 this is

when I kind of quickly saw that hey it

was above them it was that the 3mon was

above the now I don't have data for the

20 year for whatever reason it's not

loading here but it was above the 10 and

the 30 but it was only like a day and so

can I really come to a conclusion about

that not really in my opinion but if we

were to use that what did the market do

the market kind of went sideways when it

began getting under all these yields

okay and then over here if you go back a

little bit further talking 1982 this was

up there for maybe uh not even a half of

a month and you could see it inverted

and uninverted and uninverted and you

could see what was the market doing

during that time well it was going

through some turbulence definitely uh at

that given time and this is when the SPX

was at 120 and dropped it like 102 maybe

a little bit more further but I just

wanted to zoom in specifically on there

so the the the main times that I'm

looking really are when I zoom out is

the times where it lasted for multiple

months and that happened to be 2000 and

2007 and the reason why I'm kind of lean

on the fence like nobody really knows

what's going to be happening here is

because we actually haven't began un

inverting this yet now if I zoom in more

specifically to the thre Monon right

here which is the pink line we did fall

about 1.73% today and it's like I said

tracking the federal funds rate pretty

closely it's pretty much front running

what the FED will do we closed at

4.89 and this is at a time when the

Market's basically at all-time highs I

mean we're pressing really we like right

about to hit a brand new high in the

market and as we're about to hit a brand

new high and go through the rate cut

cycle oil just recently from its recent

Peak just fell 18% and while copper just

fell 177% from its recent Peak too so

there are some common things going on

here from a commodity standpoint point

from yield curve potentially un

inverting from a rate cut cycle and it

is it's it's just how do you trade this

right how do you how do you set up a

trade and this is where it's going to

get a little bit more interesting but we

we'll talk more specifically what is

that I'm doing because this doesn't mean

go short the market or anything like

that but while this is happening too in

recent trade the TLT has been kind of on

a monster terar and the TLT right can be

more of a flight to safety these are

bonds typically people fly fly bonds for

safety that's been the case throughout

history 2022 was definitely an anom an

anomaly during that specific time now as

I stated we have the FED coming into cut

rates here in September at least that's

what the Market's pricing in in fact it

was a 25 basis point cut okay where from

where we currently stand but the odds of

a 25 basis point cut have been falling

while the odds of a 50 basis point cut

have actually been increasing in recent

trade this is looking back from the

current to one day to one week and to

one month ago you can see that that the

Market's trying to price in a 50 basis

point cut and you have senators or

politicians asking now for a 75 basis

point cut reaching out to Jerome Powell

so we'll see if that's going to play out

now does this mean that the Market's

going to fall apart no not necessarily

but I think it's enough evidence to

state that what has happened in the past

when we had the 3mon well above the 10

2030 for multiple months well it

happened to be in 2006 2007 and also

here and then what happened shortly

thereafter and what was economic

commodities doing during these same

times and well the Commodities right now

like I said they're doing very similar

things and well we have't began to

unvert but you you it begs a question

like is there something really around

the corner that is going to just take

Everyone by storm is it going to be some

sort of catalyst where everyone looks

back and says well it's actually because

this specific thing happened or is it

all going to look very obvious and

hindsight if something were to take

place in these financial markets and

everyone's like

like it passes fast because of just how

fast things move these days I it's too

hard to say so what do I specifically

look for well first and foremost I

looked for still the bullish case in in

in these scenarios right and there's a

couple things that I looked for as far

as getting potentially more bearish but

the majority of times I want to trade to

the upside and why is because it's a lot

easier to trade to the up to the upside

when the trend is up uh versus shorting

the market while the market's at highs

okay so if I'm just looking at the spy

on The Daily time frame you might look

at this as a potential cup with handle

or a cup with handle here and a measured

move of a cup and handle would just take

the low of this prior pullback to its

pivot point which would be the all-time

high and you'd measure that up to around

620 on the Spy can that happen sure yeah

why not what will make it happen is if

we stay above some uh a couple of a

couple of levels which I'll go into

momentarily but I want to go to the q's

now and the q's is also in this

compression pattern and these can break

either direction but a measured move to

the upside in the q's in this specific

pattern would bring us up to roughly

around 550 I mean if it breaks out

earlier we can measure from the breakout

area but I just measured it from kind of

the Apex of this compression pattern

where you have a a high a lower high a

lower high currently you have a low and

a higher low here you can see price is

coiling up it doesn't necessarily mean

it's going to break out to the up side

but it doesn't necessarily mean it's not

going to break out to the upside so I do

find it interesting that Q's right is

heavily Tech and Tech is not nearly as

high as the spy and there's been many

cases where the qes have led the S&P 500

both from finding a bottom to finding a

top so if this were to break down I I

would think that spy if it even broks

out it would be end up being a some sort

of a bull trap but we'll we got to have

more data now in the short term we can

look at the 30-minute charts of all

these index products we got the spies

The Q's the iwm semiconductors xbi Dow

Jones Industrial they're all green what

does that mean it means that it's above

its short-term moving average we're

using the 5-day moving average on an

intraday time frame and on top of that

even shorter time frame we have that

month-to date anchored volume weighted

average price we got all above that

remember just a few episodes ago these

were all red and we said when do we get

more bullish well we can get more

bullish when this starts to turn back up

well it started turning back up and then

we said about the month to-day anchored

volume weight average price and it got

started getting above that too okay and

now price action is seeing a nice little

move so hopefully you got to catch some

of that trade or maybe add some exposure

during that now if the market pulls back

what are the key levels I would say from

the swing low like for the Spy over here

I would be looking to see how price

responds in and around those areas even

when it comes to like semiconductors

right where the month to date is by its

swing low and then also the xbi its

swing low is in Confluence with its

month- to-day anchored volume weight at

average price and then you have the qes

over here which didn't look nearly as

good as the Spy today is that telling us

something might be around the corner I

don't know and then the iw2 as well it's

kind of just right in this area where

you see this prior swing low anchored

volume weighted average price and the

month to date so if we pull back and we

can hold that could be just a pullback

and a shorter term uptrend which would

be a more positive look now when we take

a look at Gamma we do have a big

contract roll like I said already taking

place this week we'll see how this

changes over time but right now we got

50 600 right here and then 5650 we're

more near 5650 so I can see us getting

stuck in this area for a bit but if we

start cracking down through 5600 there's

nothing really going on uh up until 5500

so I'd be cautious for sure under 5600

and more bullish above it given the

context of what the gamma structure

looks like right now if I pull that up

on a specific chart you can see the 50

650 level and the 5600 level here and

we've been kind of just pinning in

between these the gamma flip line is

currently at

5570 this will change come tomorrow but

being that we're in positive gamma

territory this is where volatility

typically gets suppress dealers look to

buy the dip sell the rip buy the dip

sell the rip and that is the kind of

environment that I like to add exposure

into paired with being above an

inclining 5-day moving average so all

signs of go right now I would say if you

want specific levels yeah 5 00 below

that proceed with caution above that

that 5650 and even higher depending on

where Traders reach I'd only have more

concern per usual and start reducing

positions or at least at minimum keep my

winners and the ones that get stopped

out I would just remove from I would be

doing that if the case was we started

turning red on this screen and we

started getting back below the flip line

where you get dealers to sell into

selling buy into buying you get much

more volatile moves and volatility

typically increases if we take a look at

the spy on the 15minute time frame the

weekly expected move this week can take

us down to an around

551 and some change 55160 and then above

us at 572 43 so far the start of the

week is not a bad look for the Spy but

the cues obviously was down slightly on

the trading session going into

tomorrow's day we have a daily expected

move at 56560 and a lower at

55842 hope today's episode gave you some

insight to a bigger picture thing that

was going on from more of a bearish

standpoint or more of like hey we we

don't act like exactly what's going to

be taking place here cuz we don't and

then two like we drill down on the very

small time frames went to be bullish

went to be more bearish went to add more

exposure so hope it helped out I'll see

you later