The Best Stock Market Crash Signal
The stock market crashed on October 19, 1987, in what was later known as "Black Monday". On just this one day, the Dow Jones Industrial Average lost around half a trillion Dollars of its value, which amounted to almost a 23% drop. It is the largest single day crash to date. Thirteen years later, the stock market crashed again in the year 2000 under the nickname of "The Dot-com Bubble. And finally in 2007, the "Subprime Mortgage Crisis" hit global financial markets and caused the latest stock market crash. And ever since, analysts around the world are doing their best to predict the next crash with most failing mainly due to applying the wrong analytical tools.
In this editorial, we tackle the issue more directly, and reveal the one and only tool you need to look at in order to predict a stock market crash well ahead of time. This tool is called the Yield Curve, i.e. a curve plotting the relationship between short, medium and long-term interest rates.
Usually short-term interest rates, such as the 3-month, 6-month, etc., are lower than longer term ones, such as the 10-year, 20-year and 30-year rates. This is normal because people would expect higher returns if they land their money for longer periods of time. Now paying closer attention to the 3-month and 5-year rates, when these are equal or even worse, if the 3-month rate is higher than the 5-year rate, it usually means that people are being skeptical about the economy’s long-term outlook. When either of these two scenarios takes place, the stock market usually collapses within one to two years, or at least this has been historically the case.
Therefore, from this moment on, whenever you see a flat yield curve (when 3-month and 5-year rates are equal), or an inverted yield curve (when the 3-month interest rate is higher than the 5-year interest rate), you should automatically keep a close eye on the market and start locking some profit. Then at the first trend reversal signal, you should square your positions and get out of the market.