Yamada: Market Technicals Strong Though Record Margin Debt Spells Trouble

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The following is a summary of our recent interview with Louise Yamada on No Sign of a Market Top, which can be accessed on our site here or on iTunes here.

There’s no denying that 2017 has been a good year for investors, with most major asset classes showing gains for the year.

This time on Financial Sense Newshour, we spoke with Louise Yamada of LY Advisors about current conditions and whether she sees any signs of a market top or concerning developments.

Are We on Track for Longest Recovery?

Everything looks to be in alignment and going in one direction, and we’re already in the ninth year of this current bull market.

The cumulative advance-decline line has been confirming the rally, Yamada noted. It has been hitting new highs along with the major indexes.

nyse advance decline line
Source: Stockcharts.com

Minimal Signs of Stress

On the Dow, there were some prior concerns because the Transports had been lagging the Industrials, but last week they experienced a strong breakout.

If you look at the Nasdaq, it’s behavior looks just like the Dow, consisting of a stepping stone pattern with higher lows and higher highs.

It is slightly extended above the 50-day moving average and the trendline off the 2016 low, Yamada noted, but the Nasdaq may just be going into another consolidation period, as it did from June to October.

The only really concerning issue is the new highs we’re seeing in margin debt, Yamada noted, which are at the highest levels we’ve ever seen.

nyse margin debt
Source: Advisor Perspectives

“If we were to get some kind of a serious decline, we’d have an awful lot of margin calls coming in,” Yamada said.

Overall, however, given the technical backdrop, we’re probably on track for a continuation of the bull market from here.

Transition in Interest Rates

We’re in a transition from a falling interest rate cycle to a rising interest rate cycle, Yamada stated, and these cycles typically last from 22 to 37 years. The current falling interest rate cycle has lasted for 36 years.

“If you look at the 2-year (Treasury), you’ve got a 9-year saucer bottom,” Yamada said. “That’s characteristic of the transitions from falling to rising rates, because all of those periods have encountered deflationary pressure, and it takes time to get out of them.”

There is also concern about the flattening yield curve because the 10-year really isn’t moving, she added. One possible reason for this is that the U.S. 10-year has a much higher interest rate than many other foreign countries, which may be why we’re seeing this behavior.

We’re also getting closer to an inverted yield curve where short-term yields rise above long-term yields, which has historically signaled a problem for the stock market and the economy.

yield curve inversion
Source: FRED (annotations added)

Tax Bill Implications

A corporate tax cut would be a good thing and could extend the bull market, Yamada noted. But its effects on individuals may be harder to swallow.

“I wish they’d separated what they’re doing for corporations from what they’re doing for the individuals because it’s hitting us in the big tax states,” she said. “If we can’t deduct the state and local taxes anymore, that’s a disaster.”

Corporate tax breaks should have a positive effect though, assuming corporations bring the money back and put it to work, rather than putting it into dividends and more buybacks.

“That’s the key—what are they going to do with it once they get it?” she said.

For more information on what Yamada sees ahead for specific commodities and what she recommends for investors going forward, click here to listen to the full interview.

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