First of all, let me share with you the panic index, SKEW, which usually precedes the market for its next big move. See the panic index in white below in the past 6 months with the yellow arrows to indicate its previous spikes before S&P tanks (in blue). Right now, the SKEW Index shows traders are paying up for put options, increasing the probability of a large move in the next 30 days.
Of course, you can just ignore it as there is no certainty for anything in the market and just feel happy to further chase highs😏
Now let me share with you another chart, which may be the most important one for 2021.
This chart shows the spread between the yield on the 10-year and 3-year Treasury note. That spread has been increasing over the past several months. And, it looks like it's ready to explode higher. So why it is important? See what happened in the past 2 decades of this ratio, more precisely in early 2001 and late 2007. See the eeril similarity of the pattern then vs now? I guess you don't need me to remind you what happened during 2001-2003 as well as 2008-2009 in the stock market, right? Yes, the market melted down following the explosive expansion of the yield curve.
Be clear, I'm not saying we are on the verge of a market crash anytime soon. As a matter of fact, we may still see some highs in 2021. We all know bonds move quite slowly in general and there is a significant time lag between this bearish indicator and the material impact on the market. But ignoring this flashing warning sign may be a fatal mistake if you blindly chase the market into euphoria. 😵😨
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