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Strongest Recession Signal Ever

The yield curve has inverted to the most extreme degree ever, which is a warning that a recession is coming. In this video, I analyze the charts for the S&P 500, Nvidia, Apple, and the yield curve on U.S. Treasurys to see what they're telling us about future price action.

In the video, I mention that the bull rally following the Great Recession was primarily due to the Fed's monetary easing. The chart below shows evidence of this. When the value of the assets added to the Fed's balance sheet is compared against the value of the S&P 500, the stock market appears to have essentially moved horizontally. This shows that the primary reason for the stock market's rally is the central bank's extreme expansion of its balance sheet.

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Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.

Note

This is a scatterplot of the weekly relative strength index for the $VIX. As of the time of writing, we are currently at the lowest value since 2009.

The tide continues to pull out...

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Here's a larger dataset that shows just how extreme the current yield curve inversion currently is:

10-year Treasury constant maturity rate vs. 1-year Treasury constant maturity rate (as a ratio)

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This is actually getting insane. This chart shows the 20-month EMA of the spread between the contract in front and the second contract in front for S&P 500 futures. It continues to explode. It's hard to imagine this playing out as a soft landing.

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Yet another record high just occurred for the SPY / TLT ratio. The ratio is now moving up nearly vertically.

This indicates that the S&P 500 continues to become more and more overvalued against the risk-free asset (long-duration Treasurys), even as the former slowly declines.

The market continues to buy up stocks despite exploding yields on less risky long-duration Treasurys. Now we're approaching a point where long-duration Treasurys are yielding nearly the same as the expected return for the stock market (over the past 150 years, the stock market returned an average of ~6% to 7% excluding dividend reinvestment, and the 30-year yield is now yielding 5%). This will cause capital outflow from stocks into bonds for as long as Treasury yields are this elevated.

Note

The HYG / TLT (adjusted) ratio continues to surge to the highest levels on record.

It's hard to overstate just how bad this chart is: A new long-term bull market usually begins when this ratio bottoms during a recession. Right now, we're at the highest level ever...

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