As the first and biggest exchange traded fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has provided reliable returns for generations of long-term investors. However, an alarm bell is ringing loudly and it might be time to take a risk-off position for SPY stock.
SPY stock does an excellent job of tracking the S&P 500 index. It represents 500 large-cap and mega-cap stocks spanning approximately 24 industry groups. In other words, investors can get instant diversification through the SPDR S&P 500 ETF Trust. History shows that if you held this ETF long enough, you’d have profited even if your entry point was less than perfect. Yet, timing is still important if you’re going to buy SPY stock. The last thing you want to do is take a long position right before a stock market crash.
Is the market about to crash, then? That is the billion-dollar question. While no one knows for sure, there is a warning signal that indicates trouble ahead.
There is an old saying: if you want to know what is going to happen in the stock market, watch the bond market. In particular, some financial experts are closely watching the 2-year U.S. Treasury bond yield, which recently surpassed the 10-year U.S. Treasury bond yield. This event is called a yield curve inversion. The last time it happened was in August of 2019. Less than a year later, in March of 2020, the stock market crashed.
Reportedly, going all the way back to 1969, each of the last eight recessions — and therefore, stock market crashes — was signaled by a prior 2- and 10-year yield curve inversion. So, it is not a bad idea to reduce or hedge your exposure to the SPDR S&P 500 ETF Trust. On the other hand, you don’t have to exit your SPY stock position completely. Keep in mind that the most recent stock market crash was due to the Covid-19 pandemic, which had nothing to do with the prior yield curve inversion. Besides, there is typically a time lag between yield curve inversions and subsequent stock market crashes. If stocks are going to crater, it is not likely to happen immediately.
Thus, it makes sense to stay invested. At the same time, keep watching for further signs of problems in the financial markets.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
