Treasury Yield Curve Warns: Don't Trust Thursday's Dow Rally

Paul Franke profile picture
Paul Franke
19.33K Followers

Summary

  • October's Treasury yield-curve inversion is warning darker days are coming to Wall Street and the Dow Industrials.
  • Durable stock market bottoms take place at the tail end of recessions and/or when interest rates are falling quickly.
  • The smartest decision for traders and investors may be to sell into strength and patiently wait for more damage in the economy before moving back to fully-invested positions.

Dow Jones Industrials Average Crosses 20,000 Mark For The First Time

Spencer Platt/Getty Images News

Thursday's (November 10th) monster rally in the stock market (the Dow Jones Industrials rose 1,200 points, almost 4%) on slightly better CPI inflation data for October was the epitome of a "relief rally" during a bear market. That's my opinion, while other knowledgeable heavyweights (billionaire traders, in

YCharts - Treasury Inversion, 3-Month Duration Minus 10-Year Rate, Since 1982

YCharts - Treasury Inversion, 3-Month Duration Minus 10-Year Rate, Since 1982

YCharts - Dow Industrials Price, Yield Curve Inversion, Recessions Shaded, Since 1982

YCharts - Dow Industrials Price, Yield Curve Inversion, Recessions Shaded, Since 1982

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Points, May 2019 to April 2020

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Points, May 2019 to April 2020

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Point, January 2006 to Sept 2009

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Point, January 2006 to Sept 2009

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Points, January 2000 to Dec 2002

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Point, January 2000 to Dec 2002

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Points, May 1989 to March 1991

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Points, May 1989 to March 1991

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Points, January to December 1982

YCharts - Dow Industrials Price vs. Inverted Yield Curve, Author Reference Point, January to December 1982

This article was written by

Paul Franke profile picture
19.33K Followers
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of February 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a very minor weighting in Vanguard's S&P 500 product through a 401k plan.

This writing is for educational and informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of actual events that will occur. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. The author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. Past performance is no guarantee of future returns.

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