The Inverted Yield Won’t Doom Stocks — Buy the Dip With Call Options
- Last Wednesday, yields on U.S. Treasury bonds inverted. Now a short-term note pays more than a long-term note.
- Investors fear the inversion is bad for the economy and signals a recession is near.
- Fear in the stock market creates opportunity for those who know where to look.
- You can take advantage of investors’ fear and profit from the dip in stocks.
Big, scary stats are usually just that: BS stats.
Few carry meaningful insights into what’s going on.
Case in point is the major event that happened in the market last week.
On August 14, the two-year U.S. Treasury yield jumped above the 10-year Treasury yield.
To put that into perspective, this means that putting your money away for two years returns a greater yield per year than locking it away for 10 years.
The opposite is almost always true.
The longer you tie up your money, the larger yield you get back per year.
With pressure on longer-term yields to decline, we saw market watchers call an inversion.
The stat is that whenever we see this inversion, an economic recession follows.
I want to be clear with you: This is a BS stat. And it’s not because it’s false. It lacks context.
You see, this creates a huge opportunity for investors like us. And we can take advantage for bigger and faster gains.
What’s Lacking From the Scary Stats: Time Frame
Watch my video below to learn more about why the yield curve doesn’t mean an imminent recession.
I understand if you’re worried that it’s time to sell all your stocks and wait out the recession.
After all, recessions have not been kind to the stock market. Think back to the 2008 global financial crisis.
On average, stocks sank more than 50% over a short time.
It’s alarming to hear that this event has 100% accuracy in predicting a recession.
But it isn’t all bad news — at least not yet.
See, what gets left out of the stat is the time frame.
Sure, a recession has followed every inversion of the 10-year and two-year yields, but it’s not immediate.
In fact, the average time it takes for a recession to kick in is 22 months. That’s almost two years.
In some cases, it’s taken over two years for a recession to show up after an inversion.
The other thing is that it’s only 100% accurate when we go back to 1978. There have been five inversions of the 10-year yield and two-year yield over the last 41 years — and a recession followed each time.
But between 1945 — after World War II — and 1978, there were four inversions, and only two of those predicted a coming recession. That gives that time period a 50% accuracy rate.
In total, going back to 1945, the inversion has a 77% accuracy rate.
That’s not bad, but 100% sounds better. That’s why all the headlines use it.
Now you know a recession can be more than two years after an inversion. It’s also important to know how stocks have performed in that time frame.
A Bullish Indicator
In the 12 months that follow an inversion, stocks rise more than 10% on average.
That’s on par with the average annual return from the stock market in any given year.
This tells us that an inversion is not the panic button headlines want you to believe.
It’s actually a bullish indicator for the market — one we want to take advantage of.
That’s why it’s not time to sell your stocks. It’s time to buy!
I love buying stocks on a dip. And I know I can do even better by buying options on stocks. It allows me to generate larger and faster gains.
Make Faster, Bigger Gains
Last Friday, just two days after the Dow Jones Industrial Average sank 800 points, I recommended call options on Nvidia — which specializes in the latest computer chip technology.
On Monday, the stock jumped 4% during the day.
But my one-day gain on the options I recommended was 45%.
This 45% gain came at roughly 10 times the stock’s move and in just one day.
Dips like this create excellent opportunities to buy call options. They are designed to benefit from the bounce back. And our Nvidia call options are headed even higher from here.
Now, I’m looking to recommend more call options this week as the markets continue to climb.
To get in on the action, click here to learn more about these opportunities and join me in these trades.
Bottom line: Don’t fall for BS stats that you see in the headlines.
The data suggest stocks are heading higher, and that’s how we are going to keep generating profits.
Chad Shoop, CMT
Editor, Automatic Profits Alert
P.S. I’ll be talking about two of my best strategies to take advantage of the stock market’s volatility at this year’s Total Wealth Symposium. Join me and learn more about how you can generate more income during volatile times.