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4 Signs of Market Tops, Corrections and Crashes | Stock Talk Podcast with Chris Perras, CFA庐 - YouTube
Channel: Oak Harvest Financial Group
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i'm chris parrish chief investment
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officer at ocarina's financial group
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we're an investment management and
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retirement planning advisor located here
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in houston texas welcome to our october
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22nd stocktalk podcast keeping you
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connected to your money well last week
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in our first youtube video with
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ocarina's investment series i covered
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four of the real-time data series that
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have led strong s p 500 rallies this
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cycle there might be more market-based
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data series that help you i welcome your
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thoughts but these are the four things
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we covered
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first the euro yen currency pair
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second bitcoin pricing
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third future volatility pricing and
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fourth retail investor sentiment
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these four series are just a few of the
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ones our teams uses here at oak harvest
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you heard that right we don't pay much
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attention to most of the
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government-released economic data we
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find that is generally stale unreliably
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revised and not predictive either the
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economy or the markets people often ask
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scar team chris james troy what is your
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crystal ball saying
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and they asked this question with a
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jokingly tone
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and some advisors on tv say hey i don't
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have a crystal ball
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however i believe that all investors
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need some sort of crystal ball
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and by crystal ball i mean forecasting
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tools i mean the ability to have an
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informed educated view of what might be
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coming in the future for the markets in
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the economy if you're going to invest in
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equities actively
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and remember it will never be a perfect
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vision of the future but investing in
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equities is all about the future
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and the future is inherently uncertain
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but the future of equities is about the
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future of their revenue growth their
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future earnings growth and future
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dividends
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and while no one's crystal ball or
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forecasting tools are perfect
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you should have some consistent tools to
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help you develop an informed opinion and
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help you make imperfect decisions on the
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path of an always uncertain future
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which brings me to this week's podcast
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title things that lead early warning
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signs and tools and calling tops
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corrections and crashes yes you heard
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that title correctly think of this as
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the second in this series on the things
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that lead topic
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for almost 18 months now x a few brief
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four to six week periods the investment
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team at oak harvest has been very
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positive on equity markets
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even during those brief periods of
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market weakness we held to our positive
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market outlook and for 18 months clients
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and prospects have asked us if we were
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bothered by certain news stories they
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asked about covid wave 2 the kova delta
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wave a contested presidential election
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more recently they asked about the china
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evergrand real estate story they asked
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about global supply chain disruptions on
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the economic front they've asked about
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peak economic growth
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lately it was accelerating in flesh
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inflation they're asking about and
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more recently it's been higher energy
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prices and stagflation concerns and
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consistently we said
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no
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not really those things shouldn't matter
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yet
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why because the things that really lead
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that lead the equity markets by quarters
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and sometimes by years have said
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we're in the early to mid evenings of
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the stock market rally
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and now after 18 months well now we're
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most likely entering the post-seventh
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inning stretch so we figured that now is
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a great time to present three or four
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things that have historically been good
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early warning indicators of the coming
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peak or top that can though not they may
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not necessarily
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finally be present and cause a 10
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correction or more
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you've probably seen or heard most of
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these data series many times on tv
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already why
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because the bear camp pulls them out as
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soon as the data
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pivots negatively to a new trend
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and most of these bears then post them
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endlessly on the internet and then they
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hit the tv contributor circuit
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pretending
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doom for equity holders
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however what they almost never tell you
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is that historically speaking these data
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series are not coincident indicators
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they are not immediate red flags no
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they're more like slow flashing yellow
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warning lights
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these indicators tend
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to get the countdown started
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but they also may take a long time to
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work
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think about a range of nine months to
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two years and as we've seen throughout
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most of 2021 the markets can march much
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higher even with these early warning
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signs flashing yellow
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so here we go
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four
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signs that have historically preceded
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market tops in corrections and
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occasionally crashes
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the first early warning sign stock
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market breadth
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since april or may of this year
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research notes throughout wall street
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have been littered with warnings ranging
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from cautious to outright bearish on the
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markets because the breadth of the
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market has been trending lower since the
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late second quarter by their accounts
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i want to first remind everyone what we
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talk about when we talk about breadth of
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the market what technicians and
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strategists mean when they talk about
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breadth is they're trying to quantify
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how many stocks or what percentage of
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stocks in a given index are
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participating in the market's up move or
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down move
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in its simplest form it's just the ratio
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of the number of stocks advancing or the
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number of stocks that are green on your
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screen to the number of stocks declining
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or red on your screen
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improving breath is good while declining
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breath is bad in the barrett camps black
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and white world
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but i remind listeners peak and lower
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trending breadth is almost never a
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coincident indicator of significant
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market tops and corrections
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looking back at the first half of 2021
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market breadth peaked way back in
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mid-march
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and looking even further back in time we
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would see the market experience a
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significant breadth thrust in april of
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2020
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that's when market breadth peaked just
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after the coveted bottom you see here on
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the chart behind me which is publicly
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available on stockcharts.com
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right here that the breadth of the
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market
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for the current rally peaked way back in
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june of 2020 historic data compiled by
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oppenheimer shows that market breadth is
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not a coincident indicator
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what the data shows is that breadth in
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fact has peaked a full two years ahead
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of the price in the s p 500 since
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2013. in fact the facts are the s p 500
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rallied another 45
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between the 2013 breath peak and the
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2015 price peak
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and then once again another 35
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between the 2016 breadth peak and the
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2018 price peak
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you want to sell stocks on a peak and
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deterioration and market breadth based
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on that data
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if so you sold the s p almost 18 months
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ago at around 3 200 on the s p 500 that
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was over 40 percent lower than where the
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current market sits
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if we conservatively take early june of
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2020 as the peak and breadth this cycle
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and assume it was taken almost two years
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for the market to be affected by
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deteriorating breath
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well this would put any concerns due to
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market breath from our team somewhere in
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the first quarter of 2022 to the third
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quarter of next year
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the clock is ticking but it still looks
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way too early to worry about this timing
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indicator
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our e2w
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estimated time to worry for this
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indicator call it mid first quarter of
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next year our second early warning sign
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the interest rate yield curve direction
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by that i mean is the yield curve
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steepening or flattening remember one of
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our goldilocks signs that we've talked
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about for the last three years has been
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a steepening yield curve caused by
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gently rising long-term interest rates
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in technical financial terms it's called
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bull steepening
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post great financial crisis hitting in
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2008 2009 rising rates have benefited
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have not hurt the u.s stock market
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performance the data doesn't lie i know
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it sounds contrary to almost everything
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you hear on tv
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but slowly
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rising long-term interest rates have
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been positive for the overall stock
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market
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this cycle the s p 500 has posted an
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average price return of 15.3 percent
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during periods of increasing
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year-over-year interest rates of the
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10-year treasury bond compared to just a
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six and a half percent gain during
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periods of falling long-term interest
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rates
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in fact some of the strongest returns
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for the market have occurred when the
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10-year treasury yield rises from below
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its three-year level to higher levels
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yes you heard that right
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once again during rising long term
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periods of interest rates their three
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year average the s p 500 registered a
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16.4 percent gain
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conversely in an inversion of the yield
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curve in which short-term interest rates
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exceed long-term rates is typically
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associated with a recession in the near
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future and by near future i define that
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as 18 to 24 months with a lead time
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being very inconsistent with that in
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mind a yield curve inversion has
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preceded each recession for the past 50
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years
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that being said data compiled by credit
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suisse shows that the market has rallied
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on average another 15
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in the 18 months following the initial
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inversion with a recession hitting on
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average 22 months after the inversion
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so the typical pattern is this
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yield curve inverts the s p 500 goes
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higher and tops sometime after the curve
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inverts and then the u.s economy goes
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into recession six to seven months after
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the s p 500 peaks
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well where do we sit now the yield curve
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sits around a positive 115 basis points
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this is far above the zero line and it
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currently is a general uptrend
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those are both bullish
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this forecasting tools estimated early
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warning time is
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well its etw is no recession this year
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or next i think we can still relax on
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this one our opinion is that anyone you
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hear on tv throwing the r word around is
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literally making stuff up based on the
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data we see and based on history our
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third early warning sign
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credit spreads on high yield and junk
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bonds
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now junk bonds are a great proxy for
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foreshadowing investor confidence
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because to buy them investors have to be
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confident that the economy is strong
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enough to enable the companies that are
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issuing these bonds to pay them back in
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the future
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remember the best case scenario for any
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bond investor is this you get 100 of
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your money back and some interest along
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the way
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that's it you get your money back and a
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little reward along the way that's your
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reward for lending money to even the
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riskiest companies in the market
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these bonds however have higher yields
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because they are also greater credit
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risk and have a higher probability of
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default as the economy slows and weakens
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opportunities for business to secure
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funding begin to become scarce and the
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competition for money increases
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the ability of high debt companies to
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pay their debts diminishes these
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conditions mean that more companies tend
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to hit worst case scenarios more often
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when the market experiences stress
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bond investors are aware of this they're
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risk adverse fixed income investors sell
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bonds in their portfolios with the
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highest risk first
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these are junk bonds and less credit
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worthy companies
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this means that junk bond prices tend to
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peak and decline six to nine months in
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advance of their equity counterparts one
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can see from the jnk
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etf chart right here
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which represents the junk bond market
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that that price has recently peaked out
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and is beginning to look much like the
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pattern in october of 2017.
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did this foretell the first quarter 2018
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selloff post the trump tax cuts
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it looks that way to me our team is on
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high alert as this indicator is real
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time and rarely if ever wrong for long
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what's this indicator's estimated
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warning time
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mid first quarter of next year
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our fourth and final early warning
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indicator oil and energy prices now this
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is an interesting one for me that i
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think few investors have looked at when
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i looked at the data over the last 30
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years i found that when energy stocks
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and more particularly when old line
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energy gas names
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and oil names have been amongst the
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leadership groups in the market the
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markets are usually on a very short
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leash
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few investors recall that even during
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the internet bubble in 1999 through 2000
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one of the only stock sectors that held
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its own against energy stocks were
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energy names like eog resources and
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apache whose stocks rose almost 75 to
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100 percent during the last 9 to 12
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months of the internet boom even
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slumber's a stock rose over 75 percent
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in the nine months leading up to the
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tech bubble bursting after march 23 2000
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given old line energy names large
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year-to-date outperformance versus the
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markets our early warning signal is on
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high alert much like the junk bond
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indicator the early warning system
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places increased risk in the mid first
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quarter of next year so there they are
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for you four early warning data series
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that you can follow if you desire
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two of them are already flashing yellow
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for mid first quarter of next year are
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we changing our outlook currently
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because of these factors no but we do
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want to preview that our outlook for the
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majority of 2022 after say january or
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mid-february of next year is likely
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going to be titled something like
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curvier enthusiasm we'll be covering our
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first half 2022 outlook in the coming
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months in detail for now we think it
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still looks and acts like a bull market
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for equities albeit having exited the
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seventh inning stretch
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at oak harvest we think our clients are
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best served by us helping them with
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their future needs and risks instead of
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dwelling on the past
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our crystal ball is far from perfect
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but we like to keep you up what it's
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saying about the uncertain future not
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about rehashing what's already known
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about the certain past at ocarvis we're
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a comprehensive financial planning
[857]
advisor located in houston texas give us
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a call to speak to an advisor and let us
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help you craft a financial plan that
[864]
meets your retirement goals call us at
[866]
877-896-0040
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we're here to help you on your financial
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journey into and through your retirement
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years many blessings stay safe and have
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a great weekend i'm chris parris at oak
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harvest
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[Music]
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you
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