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Thursday, June 15, 2017

Daily update 6/15 Yield curve misconceptions

Dip buyers to the rescue.

The market gapped down, but failed to sell off.  Breadth was -60%.  New highs dropped way down to 93.  New lows shot up to 72.  It was a weaker day then the change in SPX would seem to indicate.  Today's low was right at the 20 SMA. 

The futures ended the day right at the 20 SMA again.  There are a lot of price bars that closed right in this area.  The futures have tried to break away from this consolidation twice on the upside and twice on the downside.  Will the third attempt be the one?

The green count turned down slightly, but is still above 50.  The bulls are hanging on.

People were not interested in selling into the gap down opening.  Unfortunately that does not tell us if the sellers will come out again on strength.  The short term trend in SPX turned sideways today.  Other then that the day was inconclusive in my mind. 

I keep reading articles claiming the FED should do something to steepen the yield curve or telling me I should panic because the yield curve is collapsing.  Here is a look at the 10s and 2s yield curve.

This chart includes GDP as well.   The first thing that sticks out is that throughout most of the history on this chart the yield curve was lower then it has been in this recovery  The second thing that stands out is that GDP has been lower in this recovery then before.  Can you see any evidence that a steep yield curve is good for economic growth?  I don't.  I believe I can make a case that it is mostly uncorrelated to GDP unless it dips below zero.  I think it is safe to say that a lower yield curve is not something to worry about until it gets near zero.  It is commonly believed that the yield curve must drop below zero before the U.S. will fall into recession.  While that has been true since WWII it has not always been the case.  We also know that Japan has fallen into recession multiple times without an inverted yield curve since the BOJ went to zero rates.  Therefore, I think it is possible we could see a recession without an inverted yield curve.  If that were to happen it would shock a lot of people and would likely be a big problem for stocks.  I am sure this is counter to just about every economist on Wall Street.  I can't prove that it could happen and they can't prove that it can't.  Quite the dilemma.


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