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Notes On Friday's Meltdown: Don't Let It Fool You

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Includes: BIL, DDM, DFVL, DFVS, DIA, DLBS, DOG, DTUL, DTUS, DTYL, DTYS, DXD, EDV, EEH, EGF, EPS, EQL, FEX, FIBR, FLAT, FWDD, GBIL, GOVT, GSY, HUSV, HYDD, IEF, IEI, IVV, IWL, IWM, JHML, JKD, OTPIX, PLW, PSQ, PST, QID, QLD, QQEW, QQQ, QQQE, QQXT, RISE, RSP, RWM, RYARX, RYRSX, SCAP, SCHO, SCHR, SCHX, SDOW, SDS, SFLA, SH, SHV, SHY, SMLL, SPDN, SPLX, SPTI, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, STPP, SYE, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TNA, TQQQ, TTT, TUZ, TWM, TYBS, TYD, TYNS, TYO, TZA, UBT, UDOW, UDPIX, UPRO, URTY, UST, UWM, VFINX, VGIT, VGLT, VGSH, VOO, VTWO, VUSTX, VV, ZROZ
by: Nelson Alves
Summary

If last year's interest rate hikes brought us several bloody trading days, then this year's dovishness will likely bring interesting rallies.

The 3-month GB is yielding the same as the 10-year GT.

Although I think that having an inverted yield curve will bring problems, I also think that it might be a long time before it materializes.

To my best knowledge and years of experience in the markets, the Friday's unnerved session is just that, an anxious day after what seems to be a U-turn by the Fed. I am an old-school macro-guy. That means that when the Fed signalizes a dovish stance, I see it as a positive for stocks. If last year's interest rate hikes brought us several bloody trading days, then this year's dovishness will likely bring interesting rallies.

Obviously, there are some important things to consider. One of them is the fact that the yield curve has inverted. The 3-month GB (NYSEARCA:BIL) is yielding the same as the 10-year GT (NASDAQ:IEF). And traders tend to take it as a serious and ominous signal.

Table 1 - US Treasury yields

(Source: Bloomberg)

Although I think that having an inverted yield curve will bring problems, I also think that it might be a long time before it materializes. For investors, it means that they can't just stay on the sidelines and wait for the market to tumble. The opportunity cost is huge, especially considering that the lower gravity pull from interest rates will be felt in the stock market sooner or later.

All in all, I will be watching the market (NYSEARCA:SPY) closely, and I'll be buying stocks if the coming days make me feel like my reading on the market is correct. I might even go after some tech stocks (NASDAQ:QQQ) that keep trading at an interesting valuation. It has been a long time since I've had a vision so clear on the market. But last Friday's market action helped a lot, just not the way most people would think.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.