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March 03, 2006
The Yield Curve Yet Again
SmartMoney has a good article on the yield curve as well as a nice Java graphic that shows the yield curve over time. The article explains the difference between a flat, normal, inverted and steep yield curve. SmartMoney.com (click here)
The current curve is flat and the last inversion was in 2000. The above example shows the inversion from November 2000. Needless to say, the stock market suffered over the next two years and the Nasdaq did not bottom until October 2002.
Even though the yield curve is not inverted just yet, there is so much talk about the yield curve that I must conclude that it is already priced into the market. What I find truly amazing is that the Russell 2000 hit an all time higher, the Dow is trading near a 4 1/2 year high, the Nasdaq has been rallying since October 2002 and the Finance sector has been unusually strong lately. The S&P 500 Equal Weight Index (RSP) hit a new high last week and remains well above support. The stock market does not appear to be too worried about an inverted yield curve. It should be called the worry curve as all this talk seems to create a wall of worry and bull markets just love to climb such walls.
Posted by Arthur B. Hill at March 3, 2006 05:19 AM
I agree that the RSP daily looks bullish... until you draw a TL from the 10/19 lows, up through the 1/3 and 2/2 low-tail, which was then broken solidly on 2/3. Prices have since rallied back up (on light volume, I might add) and this same TL is now resistance, capping the upside action 2/16 to 2/23. If you look at the 3/1 volume spike, and then check intraday, you see that that mostly came from selling near the High of the Day (not exactly bullish). On 2/27 the RSP daily then formed a bearish Island Reversal (IR) pattern, and the gap up to that doji has beeen resistance ever since. Until that IR pattern is negated, the path of least resistance is sideways/down. The upside action is capped. For comparison, the same kind of chart price action happened to the GE weekly chart when she broke her major ascending TL in April of 2005, and it then became resistance, and she's only gone sideways/down since then.
Posted by: Fish at March 3, 2006 07:40 AM