Inverted Yield Curve Pushes Stagflation To 1970s Levels


Simpler Trading Team

Mar 30th 2022  .  5 min read

Bell-bottom jeans tucked away in a closet may be a flashback to classic times, but this bellwether change to the market doesn’t conjure fond memories.

Inverted yield curve levels not seen since the 1970s are signaling that stagflation isn’t a distant memory – it’s here.

(Check out the free video, above, for insight into trading this changing market.)

Inverted yield curve flips bond rates

The inverted yield curve means interest rates have flipped with short-term bonds paying a higher interest rate than long-term bonds.

When the yield curve is inverted, it is difficult for banks to make money. The situation is similar to buying hot dogs for $2 and selling them for $1 – it’s a guaranteed way to lose money.

While some corners of the market seem to ignore the deeply inverted yield curve – with a booming economy and a tight supply chain – the Simpler Trading team has been watchful.

Weekly report highlights market movement

Sam Shames, Vice President of Options at Simpler Trading, specializes in options, equities, and macro trading using short-term signals. Sam uses unique indicators – the Trend Oscillator Pro and the HiLo Pro – to determine the structure and momentum in a stock setup. Both provide important information about momentum in a chart.

Sam provides a weekly detailed report“This Week In The Markets” – where he reveals key exchange traded fund (ETF) movements. This includes those associated with the S&P 500, Nasdaq, Dow Jones Industrial, and Russell. He also provides a detailed and concise breakdown of market internals such as volatility and his personally created FANG technology Index.

Sam’s technology index focuses on Facebook, Apple, Amazon, Netflix and Google – as well as others. This index weighs the FANG stocks by market capitalization and balances for price. This resource gives deep insight into the largest stocks while removing the noise from the rest of the market.

Stagflation signaling market downturn?

The HiLo Pro indicator is also used to find signals when a stock isn’t trending, but is in a range-bound or choppy trend. With the Yield Curve (T10Y2Y: FRED) reaching signals showing a fresh quarterly HiLo sell and an active monthly HiLo sell, this reveals what traders have been anticipating:

Stagflation has arrived.

Lower economic growth and high inflation contribute to stagflation. The last time the U.S. economy encountered this environment four decades ago, stagflation pushed the Fed Reserve (Fed) to raise interest rates as high as 20% to break the hold inflation had on the economy.

This makes the recent announcement of quarter basis-point interest rate hikes by the Fed seem mild in comparison.

The Fed has been walking a tightrope in an attempt to get inflation down dramatically while appeasing the insatiable market appetite for good news. The global environment – supply chain crunch, European war, political turmoil – hasn’t helped.

Yield Curve inversion levels are regarded as a warning sign for the markets. Traders closely watch the relationship between the two-year and the 10-year U.S. Treasury bonds.

With a deeper inversion not seen since the 1970s, analysts are giving consideration to an impending recession.

Trading during inverted yield curve

How do traders navigate this market shift?

When the market reveals a pattern in the yield curve that is unprecedented, traders can prepare to react differently based on this revelation. Following are some actions to consider:

  • Prepare to day trade more often due to higher volatility (get training if needed)
  • The easy uptrend is over for now – accept this and move forward
  • Work on trading both sides of the market – long and short

And, remember, when the market goes into uncharted territory, turn to chart tools and your trading plan.

While the Fed attempts to curtail inflation and get interest rates under control for a soft landing, volatility is still the name of the game for traders. The bond market and news from the global markets make the market more volatile.

Follow ‘True Momentum’ Tools

Access to veteran trader Sam Shames, who delivers in-depth research to help traders have a better understanding of market events, is a valuable asset in this volatile market environment.

Sam used his “True Momentum” tools, the Trend Oscillator Pro and the HiLo Pro, to help him grow his $80,000 account to $320,000 in only 12 months. These chart tools allow him to quickly gauge market direction and target potential trades. (Sam also provides live market information and assessment in the Options Gold Room at Simpler Trading.)

Sam’s report – “This Week In The Markets” –  targets actionable insights, provides direction to traders, and reviews in detail opportunities across the board. His chart reviews grade assets from bullish to bearish, and subscribers have access to proprietary scan results. And, he provides a curated watchlist highlighting the strongest potential trade setups for the week.

Sam provides actionable market analysis so traders can make the trading decisions based on real data rather than opinions or speculation.

Sam’s goal is to deliver advanced notice on developing trends, early warning for reversals, and opportunities worth watching. Doesn’t it make sense to be able to act before other traders even know what’s going on?

Instead of getting caught off guard by historical flashbacks, take a look at what lies ahead with “This Week In The Markets.”