Perhaps the two most important charts for investors to keep an eye on to determine when the market will recover next year are the two-year Treasury note yield and the U.S. Dollar Index Why? Because they have been leading and confirming indicators for the stock market.
Continuing increases in the two-year Treasury yield indicate that the Federal Reserve will be raising short-term rates. The federal-funds rate always follows the direction of the two-year Treasury yield.
The two-year yield’s 11-week moving average has contained every rally for the past year since the rate was 0.20%. When it breaks below the 11-week moving average, then yields will have made a top. A lot of the downside pressure on stocks will then lift, and the stock market should rally. From the two- yield chart above, you can see how rates accelerated once they hurdled 20-year resistance.
The U.S. Dollar Index, above, is the second chart to follow. The sharp bull market in the dollar has been bearish for stocks, partly because it presents a challenge to the earnings of multinational companies. Once the Dollar Index broke out, the S&P 500 began to decline from 4357. The higher the Dollar Index advances it will continue to exert downward pressure on stock prices.
Similar to the two-year yield, the dollar’s sharp advance saw each pullback hold at the 11-week moving average. When the Dollar Index breaks below that critical level, it will have made a top. Then stocks should rally.
This is when the Fed stops raising rates but is a quantitative measure that I use to indicate it is time to get back into growth stocks and funds.
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