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Here is a partial list of US stocks caught in the system's radar for this week. Lots of them.



n/a (5)Tick: VOO
Name: Vanguard S&P 500 ETF
URL: https://finance.yahoo.com/quote/VOO
Sector: n/a
Industry:
Price: 256.630005
Volume: 990400.0

Tick: USA
Name: Liberty All-Star Equity Fund
URL: https://finance.yahoo.com/quote/USA
Sector: n/a
Industry: n/a
Price: 6.69
Volume: 924200.0

Tick: IWB
Name: iShares Russell 1000 ETF
URL: https://finance.yahoo.com/quote/IWB
Sector: n/a
Industry:
Price: 155.729996
Volume: 542700.0

Tick: NAD
Name: Nuveen Quality Municipal Income
URL: https://finance.yahoo.com/quote/NAD
Sector: n/a
Industry: n/a
Price: 13.21
Volume: 244600.0

Tick: PZA
Name: Invesco National AMT-Free Munic
URL: https://finance.yahoo.com/quote/PZA
Sector: n/a
Industry:
Price: 25.280001
Volume: 198300.0


Transportation (1)Tick: CNI
Name: Canadian National Railway Compa
URL: https://finance.yahoo.com/quote/CNI
Sector: Transportation
Industry: Railroads
Price: 84.75
Volume: 774900.0




Technology (3)Tick: JNPR
Name: Juniper Networks, Inc.
URL: https://finance.yahoo.com/quote/JNPR
Sector: Technology
Industry: Computer Communications Equipment
Price: 27.860001
Volume: 4116000.0

Tick: DATA
Name: Tableau Software, Inc. Class A
URL: https://finance.yahoo.com/quote/DATA
Sector: Technology
Industry: Computer Software: Prepackaged Software
Price: 108.57
Volume: 363100.0

Tick: GWRE
Name: Guidewire Software, Inc.
URL: https://finance.yahoo.com/quote/GWRE
Sector: Technology
Industry: Computer Software: Prepackaged Software
Price: 94.260002
Volume: 338100.0


Public Utilities (1)Tick: WCN
Name: Waste Connections, Inc.
URL: https://finance.yahoo.com/quote/WCN
Sector: Public Utilities
Industry: Environmental Services
Price: 77.330002
Volume: 443500.0


Miscellaneous (2)Tick: V
Name: Visa Inc.
URL: https://finance.yahoo.com/quote/V
Sector: Miscellaneous
Industry: Business Services
Price: 138.460007
Volume: 4969900.0



Tick: TSS
Name: Total System Services, Inc.
URL: https://finance.yahoo.com/quote/TSS
Sector: Miscellaneous
Industry: Business Services
Price: 88.919998
Volume: 1223600.0


Health Care (2)Tick: MRK
Name: Merck & Company, Inc. (new)
URL: https://finance.yahoo.com/quote/MRK
Sector: Health Care
Industry: Major Pharmaceuticals
Price: 62.59
Volume: 4506200.0

Tick: AZN
Name: Astrazeneca PLC
URL: https://finance.yahoo.com/quote/AZN
Sector: Health Care
Industry: Major Pharmaceuticals
Price: 36.66
Volume: 3287400.0

Tick: MDT
Name: Medtronic plc. Ordinary Shares
URL: https://finance.yahoo.com/quote/MDT
Sector: Health Care
Industry: Biotechnology: Electromedical & Electrotherapeutic Apparatus
Price: 87.730003
Volume: 2814700.0


Finance (3)Tick: MMC
Name: Marsh & McLennan Companies, Inc
URL: https://finance.yahoo.com/quote/MMC
Sector: Finance
Industry: Specialty Insurers
Price: 86.760002
Volume: 1945900.0

Tick: EFX
Name: Equifax, Inc.
URL: https://finance.yahoo.com/quote/EFX
Sector: Finance
Industry: Finance: Consumer Services
Price: 126.639999
Volume: 649700.0

Tick: ROL
Name: Rollins, Inc.
URL: https://finance.yahoo.com/quote/ROL
Sector: Finance
Industry: Diversified Commercial Services
Price: 55.029999
Volume: 402300.0




Energy (8)Tick: MRO
Name: Marathon Oil Corporation
URL: https://finance.yahoo.com/quote/MRO
Sector: Energy
Industry: Oil & Gas Production
Price: 20.040001
Volume: 23611600.0

Tick: RIG
Name: Transocean Ltd (Switzerland)
URL: https://finance.yahoo.com/quote/RIG
Sector: Energy
Industry: Oil & Gas Production
Price: 13.1
Volume: 16330000.0

Tick: XOM
Name: Exxon Mobil Corporation
URL: https://finance.yahoo.com/quote/XOM
Sector: Energy
Industry: Integrated oil Companies
Price: 82.489998
Volume: 8306900.0

Tick: COP
Name: ConocoPhillips
URL: https://finance.yahoo.com/quote/COP
Sector: Energy
Industry: Integrated oil Companies
Price: 70.580002
Volume: 6216200.0

Tick: NBL
Name: Noble Energy Inc.
URL: https://finance.yahoo.com/quote/NBL
Sector: Energy
Industry: Oil & Gas Production
Price: 34.860001
Volume: 2883100.0

Tick: EQT
Name: EQT Corporation
URL: https://finance.yahoo.com/quote/EQT
Sector: Energy
Industry: Oil & Gas Production
Price: 54.869999
Volume: 2644500.0

Tick: SU
Name: Suncor Energy Inc.
URL: https://finance.yahoo.com/quote/SU
Sector: Energy
Industry: Integrated oil Companies
Price: 41.240002
Volume: 2592300.0

Tick: NFX
Name: Newfield Exploration Company
URL: https://finance.yahoo.com/quote/NFX
Sector: Energy
Industry: Oil & Gas Production
Price: 29.09
Volume: 2396400.0


Consumer Services (6)Tick: DIS
Name: Walt Disney Company (The)
URL: https://finance.yahoo.com/quote/DIS
Sector: Consumer Services
Industry: Television Services
Price: 110.199997
Volume: 8240200.0

Tick: ORC
Name: Orchid Island Capital, Inc.
URL: https://finance.yahoo.com/quote/ORC
Sector: Consumer Services
Industry: Real Estate Investment Trusts
Price: 7.94
Volume: 767300.0

Tick: QSR
Name: Restaurant Brands International
URL: https://finance.yahoo.com/quote/QSR
Sector: Consumer Services
Industry: Restaurants
Price: 63.220001
Volume: 744400.0

Tick: BXP
Name: Boston Properties, Inc.
URL: https://finance.yahoo.com/quote/BXP
Sector: Consumer Services
Industry: Real Estate Investment Trusts
Price: 126.93
Volume: 677500.0

Tick: CVEO
Name: Civeo Corporation (Canada)
URL: https://finance.yahoo.com/quote/CVEO
Sector: Consumer Services
Industry: Hotels/Resorts
Price: 4.46
Volume: 550900.0

Tick: BAM
Name: Brookfield Asset Management Inc
URL: https://finance.yahoo.com/quote/BAM
Sector: Consumer Services
Industry: Building operators
Price: 41.810001
Volume: 416700.0


Consumer Non-Durables (2)Tick: VFC
Name: V.F. Corporation
URL: https://finance.yahoo.com/quote/VFC
Sector: Consumer Non-Durables
Industry: Apparel
Price: 88.800003
Volume: 4311700.0

Tick: HRL
Name: Hormel Foods Corporation
URL: https://finance.yahoo.com/quote/HRL
Sector: Consumer Non-Durables
Industry: Meat/Poultry/Fish
Price: 37.169998
Volume: 2031300.0


Consumer Durables (2)Tick: ASH
Name: Ashland Global Holdings Inc.
URL: https://finance.yahoo.com/quote/ASH
Sector: Consumer Durables
Industry: Specialty Chemicals
Price: 79.860001
Volume: 508900.0

Tick: SON
Name: Sonoco Products Company
URL: https://finance.yahoo.com/quote/SON
Sector: Consumer Durables
Industry: Containers/Packaging
Price: 53.080002
Volume: 399100.0


Capital Goods (2)Tick: TEX
Name: Terex Corporation
URL: https://finance.yahoo.com/quote/TEX
Sector: Capital Goods
Industry: Construction/Ag Equipment/Trucks
Price: 43.82
Volume: 2054900.0

Tick: MWA
Name: MUELLER WATER PRODUCTS
URL: https://finance.yahoo.com/quote/MWA
Sector: Capital Goods
Industry: Metal Fabrications
Price: 11.77
Volume: 461300.0


Basic Industries (3)Tick: PAH
Name: Platform Specialty Products Cor
URL: https://finance.yahoo.com/quote/PAH
Sector: Basic Industries
Industry: Major Chemicals
Price: 12.2
Volume: 2803700.0

Tick: PVG
Name: Pretium Resources, Inc. Ordinar
URL: https://finance.yahoo.com/quote/PVG
Sector: Basic Industries
Industry: Precious Metals
Price: 8.34
Volume: 1776300.0

Tick: KBR
Name: KBR, Inc.
URL: https://finance.yahoo.com/quote/KBR
Sector: Basic Industries
Industry: Military/Government/Technical
Price: 18.68
Volume: 1647100.0



Note: These stocks are part of the system's watchlist and may or may not eventually be purchased by the system due to various reasons such as risk management, market sentiments etc. Readers are advised to do their own due deligence.


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STI had a good run this week fueled by an Asian wide rebound after the sharp decline last week due to the escalating trade war and property cooling measures. The index rose 2.14% for the week.

Despite the index's good performance this week, there are not a lot of stocks that managed to break for the uptrend yet. In fact, many that were caught in the system's radar are from the consumer defensive sector (when does investors go for consumer defensive? When they feel defensive right?). 


Here are a few of the stocks caught in the system's radar.
Company descriptions and charts courtesy of Yahoo Finance.

Stocks that are just starting to trend

Singapore Press Holdings Ltd (SGX:T39)
Singapore Press Holdings Limited, together with its subsidiaries, operates as a media company in Singapore and internationally. It operates through three segments: Media, Property, and Treasury and Investment. The company offers daily newspapers and student weeklies; publishes, produces, and distributes books; publishes and produces approximately 80 magazine titles in the areas of lifestyle and information technology, as well as operates various online sites; and provides digital advertising services.
Sector: Consumer Cyclical
Industry: Publishing

Mapletree Logistics Trust (SGX:M44U)
MLT, the first Asia-focused logistics REIT in Singapore, was listed on the SGX-ST main board on 28 July 2005. MLT's principal strategy is to invest in a diversified portfolio of income-producing logistics real estate and real estate-related assets.
Sector: Real Estate
Industry: REIT - Industrial

Dairy Farm International Holdings Ltd (SGX:D01)
Dairy Farm International Holdings Limited operates as a retailer in Asia. It operates through four segments: Food, Health and Beauty, Home Furnishings, and Restaurants.
Sector: Consumer Defensive
Industry: Grocery Stores


Stocks that are already in an uptrend

Sheng Siong Group Ltd (SGX:OV8)
Sheng Siong Group Ltd., an investment holding company, operates supermarkets in Singapore. The company's stores offer an assortment of live, fresh, and chilled produce, such as seafood, meat, and vegetables; and packaged, processed, frozen, and/or preserved food products, as well as general merchandise, including toiletries and essential household products.
Sector: Consumer Defensive
Industry: Grocery Stores

Japfa Ltd. (SGX:UD2)
Japfa Ltd., an industrial agri-food company, produces and sells dairy products, protein staples, and packaged food products in Singapore, Indonesia, Vietnam, China, India, Myanmar, and internationally.
Sector: Consumer Defensive
Industry: Farm Products

System entered a position in Japfa on 28th May 2018 at 0.55. Check out this post.


Note: These stocks are part of the system's watchlist and may or may not eventually be purchased by the system due to various reasons such as risk management, market sentiments etc. Readers are advised to do their own due deligence.


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The recent trade spat between US against China has just turned official. In addition to that, the rising of the interest rates, the exodus of funds from Asia and the Singapore property cooling measures announced last Thursday all work to send the Singapore stock market in a downward spiral. And on Friday, the Straits Times Index just formed the death cross, which many see it as an indication that there is good chance that a bear market will occur. And if you have not realized, we are now officially in the correction territory.




If you have been following my system, you would know that since the beginning of the year, the system has been giving out caution outlook for Singapore market and advised followers to scale down their portfolio and keep more proportion in cash. (Back then the outlook was shared freely via some of the social media platforms which now is only available to subscribers). The system market outlook is partly based on analyzing the proportion of uptrending stocks in the market. The strategy was explained in one of my post back in late January and was intended to warn of the high risk of correction in the US market (which as usual impacted SG market too).

The post is titled: Why am I so concerned with the Proportion of Uptrending Stocks in a Market?  
Here is another subsequent post that explained "How my system predicted the recent downturn?" which a few days after the warning, Renaissance Technologies Hedge Fund mentioned the same thing!

The reason I highlighted all these posts is not to brag but to show you the effectiveness of the system to anticipate market movements and catch reversal based on the proportion of uptrending stocks in a market plus the Pareto principle of the 80/20 rule (which is the law of the vital few). This is crucial in trading because it is very hard to profit if one is trading in the opposite direction of the overall market. (Follow the path of least resistance, remember?)


Ok, so what is the analysis saying about the current Singapore market?Singapore stock market has not been doing well generally since the beginning of the year as cautioned by the system. The rise in March and April 2018 is mostly propelled by one sector - the banks - in anticipation of rising interest rates, which spells trouble. The proportion of uptrending stocks has been falling since the start of the year until now. It may continue to fall for some time and it would bring the STI and overall market down with it. However, the lower this value goes, the higher the probability of reversal (remember the Pareto principle?).

Now this value is in the region of 30% and still decreasing. The system is waiting for the proportion to start to increase before going aggresive. By then, STI may still be declining or already reversed ahead of the proportion but as long as the increase in proportion of uptrending stocks is not confirmed, the probability of further market decline or whipsaw is high. For now, the system will maintain overweight in cash.
Why I started live trading the system in June 2016?The reason I picked June 2016 to start trading my system live was also based on this analysis. This is the time where the oil crisis has ended and the US and SG stock markets started to recover. It is during this time that the proportion value dropped to near 20% and started to reverse upwards.

It turned out to be one awesome bull market and the system's portfolios profited handsomely during this period.


This article is based on my system's analysis and my own opinion of the outcome. This does not constitute an investment advice and readers should perform own due diligence when making investment decisions.


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STI had another bad month, with potential trade war looming between US and China and EU posing big risks to the global financial system. In June, STI fell 4.65% pushing it below the 3300 level, ending the month at 3268.70 and setting the year to date low at 3237.77. While STI was plunging this month, my system's SG portfolio managed to profit for the month with a time weighted return of 2.02% thanks to the defensive stock Japfa (SGX:UD2) that currently sitting with an unrealized gain of 15.54%. Unfortunately, another stock which is the oil company CSE Global did not do so well and it pulled down the whole portfolio despite the rising in oil prices. Hence, the portfolio ended this month with only a small net gain. Nonetheless, the result is still good compared to STI.

Portfolio time weighted return for 2018Q2 is +2.89%.

Year-to-date time weighted return is still slightly in the red at -1.74% while ES3 (STI ETF) is -2.30% for the year. For most part of June, the system is around 50% in cash.

Overall time weighted return since inception (from June 2016) increased to +83.24%.

As warned in the previous month, SG market is not in a very good shape. In fact, the system has been cautious since the beginning of the year. The number of uptrending stocks is still declining. If you are not careful, you could end up catching falling knives so it is imperative that traders adhere to their trading strategy and strictly follow their cut loss plan to avoid incurring heavy losses.

Take note that as the selling continues, Singapore stocks are moving into the oversold region. This is where things become 'extremely cheap' and a market-wide reversal upward is likely to happen. Remember the post I wrote about the 80/20 rule? (https://diyquantfund.blogspot.com/2018/01/why-am-i-so-concerned-with-proportion.html). It applies to overselling too! I am not sure when exactly it will happen. Shall wait for the system to signal. The system will maintains a cautious outlook for SG for now. Subscribe as a member to catch the reversal.

One the other hand, the system is maintaining short term bullish US. This month, the US portfolio has done rather well. Check out this post at https://diyquantfund.blogspot.com/2018/06/june-2018-portfolio-performance-report.html for more details on the system US portfolio performance.

Performance Chart

Time Weighted Returns by year

Quarterly Returns

Q1Q2Q3Q4
2016+2.80%+12.83%-0.27%
2017+31.42%+10.14%+2.97%+4.29%
2018-5.09%+2.89%


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The US indices ended the month of June in a downbeat note with an early rally into mid month that fizzled away towards the end of the month. S&P500 and NASDAQ posted slight monthly gains of merely 0.48% and 0.91% respectively while Dow Jones recorded a drop of 0.59%. The risk of trade war is keeping pressure on the market performance as President Trump continues to slap tariffs on its allies and China.
This month, my system's US portfolio outperformed the S&P500 again, posting a gain of 3.53%. The  rally in small cap stocks and basic material sector which the portfolio is currently still overweight in continued to outperform the broader market.

2018Q2 return is an impressive +10.30%.

The portfolio YTD return is now +3.60%.

Total return since inception (from June 2016) has increased to +80.36%.

Currently, the system still keeps a short term bullish view of the US market but may change this view in the near future as the upward momentum of the overall market appears to be losing steam. It could be just that the market is going to take a breather or it could lead to a reversal. We'll get to know when the system gives the signal. Subscribe as a member to find out.

Total Return
+80.36%
(34.79% for SPY)


Total Return 2018 YTD
+3.60%
(2.52% for SPY)
+45.85% (2017) +19.35% (2016)


Quarterly Performance
Q1Q2Q3Q4
2016+3.36%+8.87%+6.07%
2017+16.65%+4.74%+24.40%-4.04%
2018-6.07%+10.30%



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Japfa Ltd (SGX:UD2) has became quite popular lately in the midst of the market rout. This is one defensive stock that did well so far. While STI is falling, breaking new lows it continues to break new highs. What I am trying to point out is that even in bad times, there are still opportunities for finding trending stocks. The key is to have a trading plan, be patient and consistent in executing one's strategy. Let's hope that this stock will bring a positive return to the portfolio this month.

System entered the counter on 28th May 2018 at 0.55.

Profile
Japfa Ltd., an industrial agri-food company, produces and sells dairy products, protein staples, and packaged food products in Singapore, Indonesia, Vietnam, China, India, Myanmar, and internationally.

Sector: Consumer Defensive
Industry: Farm Products


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This post is an extension of my previous post on "Is Negative Treasury Yield Curve a Good Leading Indicator for a Stock Market Crash? You'll want to know..." In my previous post, I talked about how the yield curve can be used as a reliable predictor of stock market crashes and presented my analysis of its reliability based on historical data dating back to 1960s. It is an observation that I strongly believe should not be taken lightly. In this post, I am going to make more observations on the yield curve and where I think we are heading now. Honestly, I don't feel excited about writing this post, given where I think we are heading towards (I hope I am wrong though).

Similarly, I will be using the 10-yr to 1-yr Treasury yield curve for the analysis. The convention is to use 10-yr to 2-yr yield curve but I think it does not make a lot of difference here. Here is the same 10-yr to 1-yr yield curve chart since the 1960s including the prices of both the 10-yr and 1-yr treasury yield (in reds). 



What did you observe?
I did not perform any number crunching here, just merely eye-balling at the chart as a trend follower. This is what I observed.

Observation 1
The yield curve inverts when the shorter term 1-yr yield 'catches up' with the longest term 10-yr yield to form a local maxima (purple arrow). This makes sense since shorter term yields are lower and tend to be more volatile. An interesting observation is it always happens when both yields are rising. That's why I use the term 'catches UP'. 

Observation 2
Since the 1980s, every subsequent yield curve inversion and market crash is accompanied by the yields making lower highs. In fact, the yield has been in a general downtrend since the 1980s (yellow arrow). I believe that for the next market downturn, the yield will be at an even lower highs. After a market downturn or recession, the Federal Reserves and Central Banks would lower interest rates to reduce borrowing cost and spur the economy with other cheap monetary policies which in turns would depress the rates further. From the chart, we can see that there is not much further downwards we can go. Unless we get into negative rates territory, where one has to pay in order to save. Then the question is what would be the impact? Denmark and Japan had done it. So far, it doesn't feel that bad. But what if it happens to US? How low can we go and what value is the tipping point? This would be an uncharted territory. All in all, I think things can get pretty ugly. 


So where are we now and what's next?
When I wrote the previous post on yield curve inversion, the 10-yr to 1-yr Treasury yield curve was at 0.7. As of this writing. it has dropped to 0.66. Both yields are currently rising and the shorter 1-yr yield is catching up with the 10-yr yield. My guess based on the trend is that the curve would invert around the 4-5% region, or lower. When would it happen? I don't know. After the yield curve inverts, there will likely be a market downturn. How bad can it get? Well, it appears to get worse everytime. Now that there is not much room to play around with the rates, let's hope the Feds and central bankers can pull another rabbit out of the hat. 

Would this time be different?
Maybe yes, maybe no. But based on the trends, I wouldn't bank on it that this time would be different.  It is better to have a proper risk management plan in place when the time comes. Just as when the sky is dark, I would bring an umbrella with me when I go out. It may not rain in the end. But when it does, I have my umbrella.


This article is based on my own analysis and my own opinion of the outcome. This does not constitute an investment advice and readers should perform own due diligence when making investment decisions.
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STI did not do well in May. The well-known trading adage 'Sell in May and go away' indeed came true for SG market. STI lost a total of 5.14% erasing all the gains it made in April. The fear of trade war, Italy's political turmoil shaking global market, Malaysia's political uncertainties after Pakatan Harapan surprise victory were among the reasons depressing the market. This month, my system's SG portfolio were also in the red but managed to beat STI with a time weighted return of -3.93%.

My SG portfolio has been whipsawing between positive and negative territory so far this year. Year-to-date time weighted return turned negative this month to -3.69%. For most part of May, the system is around 50% in cash. Overall time weighted return since inception (from June 2016) lowered to +79.61%.

Take note that based on my system analysis, the SG market is not in a very good shape. The number of uptrending stocks continue to decline and STI is currently sitting on the 200MA and testing an important support region. The system maintains a cautious outlook for SG for now.

While for US, the system has turned short term bullish with the recent rally in small caps and basic materials. Check out this post at https://diyquantfund.blogspot.com/2018/06/may-2018-portfolio-performance-report_2.html for more details on the system US portfolio performance.



Time Weighted Returns by year


Monthly returns







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If you had adhered to the 'Sell in May and go away' adage, you would have missed the rally in the US market this month. US stock market had one of the best month of May in 9 years fueled by the rally in small caps and basic material sector. Investors shrugged off the uncertainties created by the Italy's political turmoil and risk of the potential trade war as steel tariff is slapped onto US allies.

This month, my US portfolio outperformed the S&P500 again, posting a gain of 4.03% while S&P500 posted a gain of 2.43%. The reason for the outperformence this month is due to the rally in small cap stocks and basic material sector which the portfolio is currently overweight in. The portfolio YTD return has turned positive to +0.07%.

Total return since inception (from June 2016) has increased to 74.20%.

With the recently rally in small cap stocks, the system has turned bullish in the US market for the short term as more and more stocks are reversing into uptrend (see, I am not a perma-bear =) ).

Total Return since inception (June 2016)
+74.20% (34.02% for SPY)
Total Return YTD
+0.07% (+1.93% for SPY)
+45.85 (2017) +19.35% (2016)

Monthly Returns





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The yield curve has long been regarded as a reliable predictor of future economic activity. Since the beginning of 2018, there have been a lot of talks about rising yield as the Fed started to aggressively raise rates in the backdrop of positive economic outlook and rising inflation. A few days ago, we just saw the 10-year Treasury hit 3%, the first time since 2014 while the shorter term Treasury yields are steadily rising. Hence the concern about yield curve inversion comes into the picture. Yield curve inversion is deemed as a good leading indicator of impending bear market and recession. There are many research and analysis done to ascertain its statistical significance. For this article, I will not be looking at bear market or recession. As my quant system currently only focus on stock trading, it is more useful for me to look at whether the yield curve can be a good predictor of stock market crashes. The historical data I am using for the analysis dated back to the 1960s.

Before I begin, let me explain some of the financial jargons used in this article.

What is the Treasury Yield?As defined in Investopedia, treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations. Looking at it another way, the treasury yield is the interest rate that the U.S. government pays to borrow money for different lengths of time. The rate of return or yield required by investors for loaning their money to the government is determined by supply and demand. When demand for the security is low, the yield will rise to entice more buyers. Conversely, when the supply of the security is low, its yield will drop, making it less attractive to buyers.

What is Yield Curve?As defined in Wikipedia, the yield curve is a curve showing several yields or interest rates across different contract lengths (2 month, 2 year, 20 year, etc. ...) for a similar debt contract. The curve shows the relation between the (level of the) interest rate(or cost of borrowing) and the time to maturity, known as the "term", of the debt for a given borrower in a given period. During periods of healthy economy, the yield curve has a gentle upward sloping shape, with shorter term yield having lower yield than longer term. Reason being longer term bond has more risk so investors tend to expect a higher rate. Another explanation is investors anticipate rates to rise in the future and hence expect a higher rate if they are to lock in their cash now (see below chart).

At times the yield curve could invert. With investors buying more of longer term bond to lock in the higher yield (expecting it to drop in future), the increase in demand drives down the longer term yield. As investors anticipate bad economy in the near term, there will be less demand for short term bond, hence the rise in its yield. The outcome, if plotted on the chart would look like this.

For my analysis, I am using the difference between the 10-year and the 1-year US Treasury to determine how the supply and demand of the two securities played out over time.  Typically, the yield curve lies in the positive region of the chart. When it turns negative, that is the point where the yield curve flattens and then inverts (see below chart).

So what did you find?In the 10-yr to 1-yr Treasury (green area) chart below, I highlighted regions where the yield curve are negative. There are 9 regions in total. I also superimposed the S&P500 log price chart (blue line) for the same period.

Here is the meat of this article. Let's look at what happened around the region when the curve started to turn negative. I shall zoom into a 10 years time period and detail the date the curve turned negative, the date of the next stock market (supposedly) crashed and also how significant was the drop.


Signal 1
Yield curve started to turn negative on 29 Sep 1965. 4 months later, the stock market dropped 20% starting from its top recorded in early Feb 1966

Signal 2
Yield curve started to turn negative on 06 Dec 1967. 1 year later, in late Nov 1968 the market plummeted 32%.



Signal 3
On 09 Mar 1973 the curve turned negative. The market already started dropping since Jan 1973, registering a 47.99% drop.

Signal 4
For the 13 Aug 1978 inversion, the market didn’t really crash but it was choppy trading for the next 2 years

Signal 5
The inverse was registered on 15 Sep 1980. 2 months later in late Nov 1980 the market fell 26.20%.


Signal 6
Inversion started on 25 Jan 1989. 10 months later in early Oct 1989 the market dropped 16.38%. This drop was not that significant so I would consider it as just a correction.




Signal 7
On 20 Mar 2000 the curve inverted. This was the period of the DOT.com bubble. Few months later the market started to drop posting a decline of 47.58%.

Signal 8
The curve turned negative on 27 Dec 2005. One and half years later in early Jul 2007 the stock market plummeted 55.98% which was the Great Recession.

Are there instances where the stock market crashed but the yield curve did not invert?Yes. For example, Black Monday. On 19 Oct 1987, the market crash was not preceded by the yield curve inversion (Plotted region with a (*) in above chart).

If the yield curve inverts, what is the probability of a stock market crash?Based on the data sample above starting from 1962, if the yield curve inverts, 7 out of 8 times the market ended up in a decline in the next 1 year or so, the least being 16.38% and the most being 55.98% drop. Though the sample size is not that big (8, but I would prefer to have at least 30 instances) but I am inclined to say that this leading indicator does exhibit a significant degree of accuracy which is 87.5%

Is it useful for my DIYQuant’s strategy?For now, I would consider it as useful for risk management. Will I fully unload, when the yield curve inverses? Probably not. It has a lead time on average of 10 months. Take the 2008 Great Recession for example. The inversion happen in late 2005, but the stock market only started to plummet 1.5 years later. If I were to cash out my whole portfolio, I would have missed out the later part of the bull run. Instead, I would perhaps start buying some put options to hedge or to defer any new investment strategies. Or maybe if I am planning to sell off my properties I would start looking for buyers.

Looking at the current yield curve chart, can I say that we are still some time away from a stock market crash?
It does not mean that the stock market will not crash when there is no yield curve inversion. But if the yield curve invert, it is likely we will experience a market decline in the near future. The 10-year to 1-year yield curve has recently fell to 0.7. If you look at the chart above, the trend has been downward since 2014. When will it hit 0? Nobody knows. If it reaches 0, it is likely we still have a bit of time to run for the doors.

What is the moral of the story? Never ignore an inverted yield curve.


This article is based on my own analysis and my own opinion of the outcome. This does not constitute an investment advice and readers should perform own due diligence when making investment decisions.


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