What happened this week in the market? It was like an overflow of fear and global uncertainty. Interest rates plunged, yields inverted, trade news galore and chop fest in intraday price action. Volatility in the VIX spiked aggressively.

Global uncertainty began to pour out of China and Hong Kong as the protesters flooded the HK airport. The inflow of drastic numbers of protesters shut the airport down which sparked fear as the probability of the mainland intervention rose.

More global uncertainty set the sparks flying out of Argentina as the Argentine stock market experienced a 50% drop in just one day. The Argentine peso and bonds also dropped following a primary defeat for the business-friendly incumbent Macri.

The whipsaw midweek equity turn around saw US markets rocket higher off trade news. There was optimism in the trade news as the negotiations developed for September between the US and China. Namely, the US Trade Rep’s office announced that the impending fourth round of China tariffs scheduled to take effect on September 1 will be delayed until December for some key consumer goods, with the explanation that the White House didn’t want to crimp consumers’ holiday spending. This caused many consumer electric chains to rocket higher including Apple. The USD/CNY dropped 1.5% back toward the key 7.00 level. Gold and silver prices slumped as safe haven trades unwound.

The news pop was well, just a news pop nothing to get buyers excited as volume died out on the upside. Back to regular downside as midweek hit as Wednesday gave back all the gains. Global growth and fear came back and risk off assets took off yet again.

Global economic data faltered out of China and Germany which pushed the yield inversion further along sovereign yield curves.  Weak data out of China and Germany led to further inversions along sovereign yield curves.

It finally happened, the 2/10-year spread inverted for the first time in over ten years, the last time it happened it was the precursor for the 2008/09 financial crash. This was the indicator that lead to the previous recession. Just because it inverted doesn’t mean we’re in immediate danger, however concerns have risen exponentially. The 10-year yield dropped below 1.5% for the first time in 3 years. Stocks nose-dived off the news and the US financial sector took a beating on the day. The Dow Jones fell 800 points. The global fear affected all markets, oil dropped, emerging markets fell, and rates continued lower into the end of the week.

The 30-year US yields hit all time lows, dropping under 2% for the first time ever, and the 2/10-year yield turned slightly to close out the week.

Some good news came out of some of the US data reports. Strong July retail sales data changed the outlook for the Q3 consumption spending data considerably while productivity accelerated higher. Q3 GDP data was forecast higher as well.

Overseas in Europe, the Euro dropped and European bond yields continued to fall into negative territory from ECB Rehn’s dovish commentary, the ECB “will do whatever it takes”.To close the week, US equities rebounded slightly to erase some of the losses but the S&P 500 still dropped 1% while the DJIA fell 1.% and the Nasdaq gave up 0.8%.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Yield curve inversion

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 2.88%
  • Technology up 0.53%
  • Financials down 0.80%
  • Retail down 3.06%
  • Utilities up 0.72%

Overview of key markets last week (bottom chart):

  • Crude oil up 0.27%
  • S&P500 up 0.45%
  • Silver was down 1/75%
  • Gold down 0.9%
  • US dollar up 0.82%

Yield curve inversion

Yield curve inverts, the Fed is cutting.

What a week in US markets, stocks and bonds. We saw the 2/10-year yield spread invert even though it was temporary. It was the first time we’ve seen this in over a decade. The 30-year yield fell to all-time lows and markets fell, prompting Trump to fluster and call the Top 3 banks CEO’s. The word “Recession” is a living reality now. When? Could be in a year, two years, or less. No one knows.

Let’s look at the first thing that caused panic and the talk of Recession. The all-time low of the 30-year yield and the 2/10-year inversion. The graph below illustrates the 30-year yield on the left-hand chart (orange line). The 2/10-year yield spread inversion is on the top right.

The drop of the 30-year yields to all-time lows below the 2009 low. In the left-hand image, you can see the 10-year yield as well (black line). The 10-year yields did not manage to drop to all time lows but it is very near. The all-time lows on the 10-year were formed in 2012 and 2016.

The 30-year dropped below into the 1.93% all-time low and the 10-year below 1.50%.

Yield curve inversion

With these outrageously low rates, we fear NIRP in the US while the short term yields surpassed the longer-term yield as the 2/10 inverted. The drop in US bond rates to such lows is detrimental to the strength of the S&P 500 as the gap between bond yields and the S&P 500 widens. Why is that so concerning? It is because typically the two move lockstep, take a look at the YTD yields vs the S&P 500 below. The green line is the S&P 500, all of the other colored lines are bond yields. The huge discrepancy can only be solved through two scenarios. One more likely than the other.

The less likely scenario is all of the yields rally together to catch up to the S&P 500 gains. For that to happen, the Fed has to start hiking rates, and the S&P 500 can’t fall.

The more likely scenario is the S&P 500 catches down to the low yields and the bloodbath happens in the US equity market.

Yield curve inversion

Where does the inversion of the 2/10 year yield leave us? This is the first time since 2007 that this has happened. An inversion precedes a market crash. That does not, however, mean that it will happen with 100% certainty or that it will happen soon. The 2/10 just inverted this week, if it rebounds and gets back up to the positive spread we could have delayed the “Recession” talks.

The last time it inverted was 2006-2007 and it stayed inverted for a really long time. Not until it drastically climbed higher did the market crash present itself. Meaning this time through if we continue to slump and we stay inverted for an extended period of time. For example months on end, then we may experience a Recession or crash in 12-16 months!

The week started off with some good news that Trump was extending the tariffs on Chinese goods from September 1st to December 15th. Although it may seem like a step in the right direction for the trade deal, it was really to get the retail numbers in during the season before the tariffs. This prompted the market to rally aggressively into the 2945 resistance before the fall happened and what many traders thing was just the plunge protection team helping markets.

On Tuesday’s massive drop Trump held a meeting with Wall Streets top CEO’s from BoA, Citigroup and JPM. A very weird reaction to the declining markets.  The President showed his fear by doing so when the markets plunged 5%, what are we going to do when he wants to cut rates by a full percentage point and there’s nowhere else to go while markets go down 30%?

Yield curve inversion

Options Trade of the Week

This week’s trade of the week is USO Long Idea. Oil markets dropped drastically in the prior week and held a double bottom level really well. We were looking for a long into the $12.00 as we saw that Saudi Arabia and Russia, two massive competitors were concerned about oil and looked to cut production again. Until the end of the week that is when it was announced that the cut was unlikely. The fact that OPEC + was coming together to take control of these markets led us to believe that the fade off this downs was a trade in the right direction. Oil prices also dropped on weaker volume and the fade at a key support level presented itself.
Oil rebounds off lows pressing USO higher. USO gaped to the upside on Friday’s oil burst higher. There may be more upside to oil is Saudi Arabia has something to say about it considering they were showing signs of concern when prices were crashing. We are interested in a partial gap fill on Monday for a long around $11.10-11.35 on USO for the continuation higher. Be advised this is somewhat of a fade to the down move so it may be a riskier trade.
There is an air of aggression to this trade idea as oil opened high and price began to climb, we wanted a pullback to close the gap but had to get in sooner taking on more risk and trailing stops up to $11.80. A fill intraday on the burst higher. The week long trade turned into a day trade.
  • Long Idea $11.10-11.35
  • Options trade of at least 90-180 days of time value
  • Long Call strike at 11
  • Short Call at 12-12.50 (skip this step if outright bullish)
  • Stop below $10.50

Yield curve inversion

Weekly Economic Calendar

Slow economic data week up ahead. There are a few important US meetings to keep an eye out for. Along with potential tape bombs as trade tensions rise and recession concerns mount.

Monday, monetary policy meeting minutes out of Australia. Keep an eye on the Aussie Dollar.

Tuesday, no high impact events.

Wednesday, CPI data out of the Canada. FOMC meeting minutes out of the US, watch out for any monetary policy updates.

Thursday, data out of Europe, French and German flash manufacturing PMI. New Zealand retail sales.

Friday, core retail sales out of Canada. Fed Chair Powell speaks and Day 2 of the Jackson hole Symposium, keep an eye on US equities and have a live news service to catch any of the bombs that may be presented.

Yield curve inversion

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