Market sentiment is bullishness, by far … last week marked the deepest yield curve inversion since 1981 … we want to hear from you about a recession … a huge event with Luke Lango

 

Do you know what bullish investors love?

Bearish investors.

Let’s follow the well-worn pattern…

There’s a painful bear market… market conditions begin to change and/or they’re murky … optimistic bulls view these changing conditions as a budding bull market while bears view it as a head-fake…

Bears remain on the sidelines and/or continue selling to the bulls, who are more than happy to buy lower-priced shares and climb the “wall of worry.”

However, at some point, bulls become a victim of their own success. After market gains accelerate, FOMO kicks in and frustrated bears turn into reluctant bulls, which ramps up the market gains even more.

This pushes a new batch of bears into the bull camp, which drives stocks even higher. And before you know it, the predominant market sentiment has shifted from “mostly bearish” to “mostly bullish.”

And when this bullish skew becomes too extreme, watch out. After all, when everyone is a bull, who’s left to keep buying?

Bottom line: Bulls love bears because they are to the stock market what oxygen is to a fire.

Fuel.

So, what’s the point?

The market’s fuel is growing a bit thin

According to Vanda Research, retail investor exposure has reached “max bull” levels.

The American Association of Individual Investors (AII) is finding a similar conclusion.

From AAII last Thursday:

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 4.5 percentage points to 46.4%. This reading marks a new high for 2023…

Optimism is above its historical average of 37.5% for the fifth consecutive week. This has been the longest above-average streak since a five-week streak in October and November 2021…

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 3.0 percentage points to 24.5%. At five consecutive weeks, this is the longest that pessimism has been below 30% since a five-week streak in October and November 2021.

Meanwhile, CNN’s Fear & Greed Index continues to register “Extreme Greed” as the prevailing market sentiment.

To be clear, this does not mean the market is about to crash. We don’t know exactly where the market is in this transition from “mostly bearish” to “mostly bullish.”

Furthermore, this type of snowballing bullishness can make investors a tremendous amount of money while animal spirits own the day (more on how to do this later in today’s Digest).

So, this bullishness is fantastic…until it isn’t.

But hey – as you can tell, my tone remains a bit cautious, so clearly the odds favor more gains!

One thing keeping my tone cautious is the new milestone we reached last week in our current yield curve inversion

To make sure we’re all on the same page, a yield curve is a graphical representation of the yields of all currently available bonds – from short-term to long-term.

In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a two-year bond and more yield from a 10-year bond.

But when economic conditions become murky and investors aren’t sure what’s on the way, this can change. Specifically, uncertain economic times tends to flatten the yield curve.

And if the yield curve goes from flat to inverted, history has shown that it serves as a highly accurate predictor of recessions, though the timing of those recessions is varied. Since 1978, the yield curve has inverted six times and has preceded a recession every time.

As we stand today, the yield curve has been inverted since last summer. And last week, we hit the deepest inversion level in more than 40 years.

From Yahoo! Finance:

Expectations of another rate hike by the Federal Reserve to tame stubbornly high inflation helped push a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981 on Monday, once again putting a spotlight on what many investors consider a time-honored recession signal…

Yields on two-year Treasuries have been above those of 10-year Treasuries since last July. That inversion briefly reached negative 109.50 basis points on Monday as shorter-term yields fell less than longer-dated ones, creating the largest gap between shorter-dated and longer-term yields since 1981. 

Here’s a chart of the “10-2 Spread” that shows this yield curve inversion. Though the spread has begun a bounce back toward zero, you can see last week’s historic low.

Older investors will recall that the last time we hit this level of inversion, the U.S. was in the early months of the 1981 recession that dragged out until fall of 1982.

But with the yield curve inverted for an entire year now and the economy appearing nowhere near a recession, is this inversion a rare false alarm?

The inverted yield curve isn’t an infallible recession indicator. We’ve featured research from our macro expert Eric Fry who has pointed toward past years in which the U.S. economy saw an inverted yield curve yet no recession followed.

Such an outcome is possible today, but we need to remember two things.

One, according to Verdence Capital Advisors who studied the data going back to 1978, it takes about 15 months on average for the economy to enter a recession after the yield curve inverts.

That puts a potential recession on the calendar for this October.

YCharts reports that an inversion has occurred 6-24 months before a recession, which means a recession-start could drag out until next July.

Two, the extraordinary amount of money the Federal Reserve printed and poured into the economy following the pandemic supports the idea of a delayed recession rather than an avoided one.

Here’s Lance Roberts of RIA Advisors:

Given the massive increase in activity due to a shuttered economy and massive fiscal stimulus, the reversion may take longer than normal…

…We would already be in a recession if we had entered this current period at previous growth rates below 4%. The difference is the contraction began from a peak in nominal GDP of nearly 12%.

Therefore, while the economy has corrected sharply from the stimulus-induced economic surge, it has not yet turned negative.

Stepping back, we want to hear your thoughts on this.

A few weeks ago in the Digest, we featured a “reader takeover” issue in which we published the perspectives of our readers about the stock market looking forward. Let’s do it again, this time focusing on recession risk.

Will we avoid a recession? Or is one coming but it’s just taking a bit longer to get here?

Or do you think we are already in a “quiet recession” today? To what extent are you feeling a recession in your own household budget?

Reply to this Digest issue and let us know your thoughts.

Now, if market sentiment is veering toward “greed,” and the risk of a recession still lingers, does that mean we need to be contrarian and go into safety mode?

While caution is always appropriate, that wouldn’t be our takeaway today.

Here in the Digest, we’ve been recommending investors approach today’s market with a “trader’s” mindset. You might have heard the phrase “dance while the music’s playing, but dance near the door.”

In other words, be in the market as the gains are piling up but participate with the idea that the stocks you’re buying are little more than wealth-building tools. Your allegiance to these tools will last only as long as they’re effective at growing your portfolio. When they stop being effective, you’ll trade them in for a new, better tool (or cash) whether that’s in a week, a month, or decade.

So, with a trader’s mindset, you’ll wade into the market, ready to cut your losers fast, let your winners run, and ride the bullishness as long as it’s here.

This dovetails into important research from our trading expert Luke Lango about one corner of the market that’s producing an eyebrow-raising number of winners today (and it’s not AI).

Here’s Luke:

What if I told you that one tiny sector of the stock market was regularly responsible for more than 30% of the market’s biggest winners?

Not just right now but every day, week, month, year.

You’d look at me skeptically. Maybe you’d call me crazy. But, nonetheless, it is true.

I’m looking at this year’s leaderboard right now; five of the top 10 best-performing stocks are from this tiny sector.

Over the past year, this sector accounts for six of the top 10 best-performing stocks.

In 2021, it accounted for four of the top 10 stocks.

In 2020, five of the top 10 stocks were from this sector.

And in 2019, three of the top 10 stocks were from this sector.

It turns out that these “Primed Stocks,” as Luke calls them, have produced 47 triple-digit winners over the past six months.

But if this corner of the market is producing so much wealth, why isn’t everyone talking about it?

Because this sector has a “fatal flaw.” And according to Luke, it’s the reason most investors steer clear…

Heightened risky.

He calls this sector “the quintessence of high-risk, high reward.” But here’s Luke with the logical follow-up question:

What if there is a way to invest in the sector while mitigating risk? What if there was a way to tap into this sector’s regularly huge profit potential while reducing downside exposure?

Theoretically, that would be the best trading strategy on the planet.

And that brings us to Luke’s special live event tomorrow night at 7 PM ET.

The evening pulls back the curtain on this high-flying sector, while walking through Luke’s market approach that enables investors to trade it while greatly reducing portfolio risk.

Back to Luke:

My team and I just developed an AI-driven quantitative trading model to remove the guesswork and reduce the risk from investing in this particularly explosive sector.

We’ve developed a “smart” way to invest in the most explosive hidden bull market on Wall Street.

If you’re interested in the idea of trading this market for as long as the bullishness is here, this is the evening for you. You can reserve your seat by clicking here.

Pulling back, yes, market sentiment is growing greedy. And yes, we can’t rule out a recession.

But bullishness is here today. And big money is being made – especially in the explosive corner of the market Luke has identified. With a trader’s mindset, we can join in these gains while reducing our downside risk.

I’ll give Luke the final word:

There are literally hundreds of stocks in this specific hidden bull market that could soar 1,000% in less than a year…

But know that this corner of the market is only for the most serious traders.

If that sounds like you, then I urge you to attend our Grand Debut event on Tuesday, July 11, at 7 p.m. EST, when we will unveil this high-octane quantitative trading system for the very first time.

Have a good evening,

Jeff Remsburg