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Should We Worry About the Yield Curve? BY MICHAEL SALVATORE, EDITOR, TRADESMITH DAILY In This Digest: - The yield curve is back in the news…
- Stocks end the first week of the year in a better mood…
- The Power Factor stocks to buy this month…
- How our seasonality breakthrough pins a trade down…
- This week: a full breakdown of TradeSmith’s biggest-ever breakthrough…
The yield curve is back in the news… For the uninitiated, the yield curve is a measure of the yield on long-duration Treasurys (like the 10-year bond) and shorter durations (like the 3-month bill). In a normal economy, you would expect a higher yield loaning your money to the U.S. government for a long time as opposed to a short time. But – by that standard, anyway – we haven’t been in a normal economy in more than two years. Check out this chart of the yield curve, subtracting the yield of the 10-year bond from the 3-month bill: 
Whenever the blue line on the chart above crosses below the horizontal black line, you earn more from owning short-term Treasurys than you do long-term Treasurys. As you can see, this had been the case from October 2022… until just this past month. And as we’ve pointed out in these pages, this was the deepest inversion of the yield curve in the past 50 years. What’s worrying about this is the areas shaded in gray. Those are U.S. recessions. For many years, economists defined a recession as a period beginning when U.S. GDP falls for two consecutive quarters. For some mysterious reason, recessions got more broadly defined in 2022 when it seemed like we might be entering one. We didn’t enter a recession back then, word-twisting aside. Check the chart of Real (inflation-adjusted) GDP below for the data: 
In any case, the concern now is that since the yield curve has disinverted, the chances of an official recession have increased dramatically. And to be certain, each time the yield curve has disinverted in the past 50 years, we saw a recession very shortly after. There are two ways to look at this. For one, I’ve been saying in these pages that we’re already in a recession of the “have-nots,” where the poorest members of U.S. society are already feeling the traditional effects of a recession. Unemployment, while low, is growing. Credit card balances and defaults are rising. And so on. A situation like this, where consumers are in such dire financial straits, would normally be concerning for the stock market. But I would contend that, in the new era of technological dominance instead of manufacturing dominance as a share of market capitalization, a downturn in consumer spending doesn’t have as harsh an impact as it had before. The second way to look at this is that a true broad-based, “official” (whatever that means) recession is coming because of the yield curve disinversion. Here’s the problem: The only way we’ll see the yield curve return to “normal” is if the Federal Reserve keeps cutting short-term lending rates at a pace as fast or faster than the long-term yield rises. And the Fed has already said it’s going to cut fewer times in 2025. That means long-term Treasurys have to rise very, very fast in the months to come. And the primary fuel for that fire is inflation data. Inflation needs to remain entrenched, staying the same or rising higher, for bond traders to have any good reason to keep selling long-term Treasurys and demanding a higher yield. That means inflation data will remain the most important piece of news each month, a time where we should look out for volatility. However… Despite all this, I’m still bullish on the stock market. As said above, the rise of technology-based companies, which often have large enterprise-focused businesses, provides a moat against consumer weakness. And no matter what happens with inflation, consumer spending, and other “real economy” metrics… Company earnings will always guide the path of the market. If you’re in companies that are continuing to grow their earnings, revenues, and profit margins in good or bad economies – and we’ll get to those in a moment – you’re on the right track. In sum: Be watchful of bigger signs of recession or economic crisis, but otherwise stay the course and stay tuned to our insights here in TradeSmith Daily. A dreary December is giving way to a brighter new year… As we showed you last week, down Decembers are pretty rare, happening roughly 30% of the time. And when they do, they tend not to be bad omens about the year to follow. Friday’s rally took a bit of the pressure off worried investors. As I write on Friday, the S&P 500 is up more than 1% and seems to be following through. There’s an elephant in the room with this positive price action, and it’s the state of S&P 500 company breadth – less concisely known as “the number of companies trading well.” Here’s a chart of the SPDR S&P 500 ETF (SPY), alongside a measure of S&P 500 stocks trading above their 200-day moving average (MA): 
Right now, just over half of S&P 500 stocks are trading above their 200-day MA, a condition we haven’t seen since just before the 2023 October slump. If this continues to deteriorate, it could well mean a prolonged downturn to start the year. A rapid improvement in breadth, though, like we saw back in the first half of 2023 and the end of 2024, could give stocks the kick in the pants they need to stay on track. Remember, we have clear levels to watch for the S&P 500, defined by the index’s historical volatility, or what we call the Volatility Quotient (VQ%). The current Yellow Zone, a caution area, is down at $555.17 for SPY. The current Red Zone, a full-blown sell signal that rarely occurs outside of true bear markets, is down at $521.43. SPY is trading at $589 today. We want to see SPY trade above these two zones. And we want to see breadth improve to strengthen the bull market. But until the former is no longer the case, we should take advantage of the lower prices. One way to do that is with Power Factor stocks… Regular readers have come to know and love Power Factor stocks. These are the kinds of stocks that continually trade well, and for good reason. They’re companies with sterling business fundamentals… strong growth rates in earnings, revenues, and profit margins… and the telltale signs of major buying volume that could only come from Wall Street’s biggest institutions. Every week here in TradeSmith Daily, we share the most recent Power Factor stocks as determined by our own Jason Bodner’s quantitative rating system. Jason has distilled these Power Factors into an easy-to-understand score. The closer to 100, the hotter the name. The stocks down toward 0 are to be avoided at all costs. Here’s last week’s list (the newest list will make its way to Quantum Edge Pro subscribers later today): 
Today, though, I’d like to do something different with the names in front of us. Recently, we at TradeSmith launched what’s likely to be the biggest breakthrough since TradeStops, the software that laid the foundation for our business. It’s a new strategy that, much like TradeStops, relies on a stock’s historical price action to determine the best times to buy and sell it throughout the year. And in an 18-year backtest, 2006 to 2024, an active strategy of trading these strongest seasonal patterns in the market beat the market more than 2-to-1. The S&P 500 was up 412% during that timeframe, and this strategy produced an 857% return: 
The really great thing about TradeSmith’s software platform is that you can easily combine multiple tools together. In this case, we use momentum criteria to confirm the optimal seasonal patterns for this strategy. And what we’ll do today is look for the top Power Factor stocks that also have an upcoming seasonal window to trade. Now to be clear, Jason typically considers a stock with a Quantum Score above 85 to be a little overheated and likely not a great buy. Scores between 60 and 85 are the sweet spot for new entries. That’s how we’ll set up our screener. We’re looking for mid- to large-cap U.S. stocks in this sweet spot that also have a seasonal pattern beginning in the next 20 days with at least a 70% historical accuracy rate and a 5%-plus average return: 
Sorting by Quantum Score, a few names jump to the top. 
And looking through the data, the most exciting of these looks to be Marvell Technology (MRVL). Starting today, Jan. 6, MRVL has a seasonal window running through Jan. 26 with an accuracy rating of more than 86.6% – meaning it’s been positive 13 out of the last 15 years. Its average return is 5.4% through that span. And as you can see in the chart below, that’s just one of several seasonal windows. Just this one stock offers five bullish and three bearish trade ideas in 2025: 
And in case you’re wondering, MRVL isn’t an S&P 500 company (it’s in the Nasdaq 100), but it’s well above its 200-day MA. Focusing on winning stocks like these only gets more important as the broad market slides and weaker stocks fumble. And TradeSmith’s world-class software makes the search so much easier. If you want to test out our newest seasonality tool on any stock that’s on your mind, for free, just go here. Then be sure to tune in to this Wednesday’s event with our CEO, Keith Kaplan, where he’ll show you how to unlock its power as a short-term trader. To your health and wealth, 
Michael Salvatore
Editor, TradeSmith Daily | 
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