Last week, I put more money to work in U.S. stocks than I ever have in my life…
How could I invest so confidently after the December crash? And why do I believe now is such a great time to buy?
You see, the big concern everyone has with buying stocks today is this…
How do you know that the current correction isn’t the start of the next “Melt Down”?
I’ve got a simple answer that I’ll share today. Actually, make that two…
Today, we’re making another “regular check-in” on two indicators with near-perfect track records of calling Melt Downs before they begin. As I’ll show you, these two measures get to the heart of why I’m buying stocks now, when so many other investors have been spooked out of the markets.
Let me explain…
I can’t know the future, of course. But if you ask me why I don’t believe the current correction will become the Melt Down, my answer is simple…
As you likely know by now, I check up on several early warning indicators to measure the health of the bull market on a regular basis.
Two indicators I follow have flashed ahead of basically every market peak and recession of the last few decades. Importantly, they have NOT signaled yet this time around.
We’re getting close to a signal on one of these indicators. But as I’ll show you, that doesn’t mean it’s time to panic.
Let’s get started…
My first indicator is called the Leading Economic Index (“LEI” for short).
It comes from an independent research group called the Conference Board. The Conference Board’s LEI for the U.S. looks at 10 different economic indicators – everything from employment to housing. If you want to get a broad look at how the economy is doing, this is one of the best ways to do it.
This indicator also has a powerful track record of predicting recessions (which tend to coincide with stock market crashes, as I showed you last month).
The chart below shows the year-over-year change of the LEI. As you can see, every recession of the past 50 years happened after the year-over-year percentage change in the LEI went negative…
This indicator is reliable – it’s only given one false recession signal. And right now, it’s nowhere near dipping below zero.
That tells me that the economy is still growing… And a recession and stock market bust is NOT imminent.
This brings us to my second indicator. If you’re a longtime reader of mine, you already saw this one coming…
It’s what I call “the most important number in finance.” And it’s the most important Melt Down indicator I track.
Specifically, I’m talking about the interest rate spread between 10-year and two-year Treasury bonds.
This spread is important because long-term and short-term interest rates move for different reasons. Longer-term 10-year yields move based on market forces. But short-term two-year yields move largely because of the Federal Reserve.
In a healthy market, long-term rates should be higher than short-term rates. Investors demand higher payments when they lock their money away for a long time.
However, this historically normal relationship is changing now… The Fed has been hiking interest rates in recent years. Short-term rates have risen. Long-term rates have, too, but not nearly as quickly.
History tells us that when the yield curve inverts (and two-year yields move higher than 10-year yields), bad times are ahead in stocks. You can see it in the chart below…
This has worked going back 40 years. Stock market peaks happened in 1980, 1989, 2000 and 2007. They happened every time the yield curve inverted and the line dropped below zero.
This indicator has been inching closer to zero in recent months, but we’re not there yet. That’s important. It tells me the current correction likely isn’t the next Melt Down. History says the Melt Down shouldn’t begin until this indicator moves below zero.
Not only that, but this tends to be a leading indicator. That last point is incredibly important: This indicator doesn’t signal at the peak… It signals before the peak.
Generally, stocks have another 12 to 18 months of good times after the yield curve inverts. We haven’t seen a yield-curve inversion yet. And even if we did, we should still be clear in stocks for at least 12 months, based on history.
That’s why I have the confidence to buy when others are fearful.
I know from more than 25 years of experience that a worried market often gives us a major investing opportunity… But looking at these hard measures is what gives me courage in my convictions. It keeps me from making decisions based on emotion.
So it’s OK if you call me crazy for what I did last week… by making my largest-ever commitment to stocks.
I don’t think I’m crazy at all…
The incredible December correction created a buying opportunity. And the two indicators above (with great track records) tell us this bull market still has room to run.
In my opinion, based on my experience and my number-crunching… the “Melt Up” is back. And I’m simply getting positioned to take advantage of it.
I encourage you to do the same. Base your investing decisions today on hard data… not emotion. And as always, follow your trailing stops to protect your downside.
Good investing,
Steve
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Source: Daily Wealth