Market warning signs

Market warning signs every trader should be watching

VIX

VIX trend is a good measure of investor anxiety, which many traders use as protection on open positions. So a rising VIX suggests investors are willing to pay more to protect against a selloff in stocks. The VIX’s historical average is around 20. VIX above 20 can be an early warning of a downturn.

Swiss franc

Switzerland has a large, safe, and stable banking industry, low-volatility capital market, virtually no unemployment, high standard of living, and positive trade balance figures. Swiss franc is an exceptionally strong and stable currency. The franc's so-called safe haven status means that it appreciates during times of economic and political instability, which was the case when the European debt crisis erupted in 2008. 


Gold

For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money, and its value is not impacted by interest rate decisions made by a government. Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs, investors tend to switch their funds into gold, which drives up its price due to increased demand.


An inverted yield curve (10-year yield minus 3-Month yield )

An inverted yield curve, which occurs when short-term interest rates exceed long-term rates, is one sign that most people may be worried about the economic recession. The yield curve inverted briefly in early 2006, while the economy was still strengthening, as the Fed continued to raise interest rates until June 2006. The curve inverted again in late 2006, just as the unemployment rate was bottoming. The Fed started slashing rates nearly a year later in September 2007, as the economy slowed and liquidity started drying up. Twelve months later came the onset of the 2008-09 global financial crisis.


Declining consumer sentiment

Consumer sentiment drives buying decisions, and consumer spending accounts for about 70% of the U.S. economy. A downward trend in sentiment warns of a pullback in discretionary spending, which can presage an economic slowdown and a stock-market decline.The trend in sentiment over time is more important than a specific level. The index started declining rapidly in 2006, to warn that an economic slowdown was on the horizon. The index didn’t bounce until after the recession set in late in 2007.

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