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Back in my early days of investing, I learned quickly to ignore analysts – because the firms they worked for pretty much dictated their opinions.

In fact, when a firm wanted to pick up shares on the cheap, they’d tell their analysts to lower their ratings on a stock. Then, when they wanted to unload those shares on the public, they’d have their analysts issue a “buy rating” on the stock.

So, because I have such distrust of analysts, I had to find some solid indicators that were quantifiable and wouldn’t lie to me.

Today, I’m watching four indicators that, in time, will tell me when a bottom is forming in the stock market, and in some currencies also.

The first indicator is European bond yields – particularly those in Italy, because that country is in the crosshairs right now.

As I write this, Italian bond yields are still hovering dangerously between 6% and 7%, but earlier this week they surged way over the 7% mark.

Any time the yield climbs above 6%, you know that investors perceive much greater risk and therefore demand a much greater reward.

This is one way to gauge what investors are thinking.

Watch Italian Bond Yields

Once the worst blows over, the yield will start to fall back into a more normal range of 3%-5%.

However, yields on 10-year Italian government bonds, in spite of recent developments and the growing belief that Eurozone leaders may be moving closer to an overall solution to the debt crisis, are still above 6% – and that means we still haven’t hit bottom.

Italian bond yields today were at 6.49% – but check out the chart below to see how they’ve been performing.


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So that’s the first indicator: the Italian 10-year government bond yield. This indicator judges the “trust” of investors. Until the yield drops below 5%, there’s no bottom forming in the market.

Wait for the TED Spread to fall

The next indicator judges the trust of banks.

Let me illustrate. When I get on an airplane flight, if the ride gets bumpy, I simply look to the stewardesses. They fly all the time. They know what a real concern is and what is not. If they aren’t scared… I’m not either. However, if they get wide-eyed, that’s when I start to get concerned. And so it is with bankers…

When there are bumps in the economy, I watch the bankers. If they aren’t nervous then I’m not nervous either. However, if they perceive that things are getting worse, their trust level for other banks drops. This is “trust level” is quantified in the TED Spread.

The TED Spread charts the difference between what they feel are “risk-free” T-bills and LIBOR (the London Interbank Offered Rate), which is the perceived credit risk in lending to commercial banks.

When the spread rises, banks start to lose trust in one another, because they feel that another bank could default.

I pulled up a three-year chart of the TED Spread ($TED) on stockcharts.com. As you can see below…banks don’t trust each other again!


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For a bottom to form in the stock market, this TED Spread has to head lower. Now, it looks as though bankers are really starting to get alarmed.

The last two indicators I’ve placed on one chart below. On top, I’ve charted copper and on bottom I’ve charted the dollar.

Keep a Close Watch on Copper and the Dollar


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Another sign that the market has hit bottom and that it is beginning to turn is the price of copper ($COPPER). Copper will turn higher when demand returns to the global economy.

You see, most things we have or use require copper. It’s one of the most widely used industrial metals. It’s in our homes, our businesses, our computers, our cell phones, our cars, etc.

When copper turns higher, it means that more things are being built and used by people globally. This happens when the global economy is improving and consumers are buying again.

The U.S. dollar (UUP) also will turn lower when the global economy begins to improve. Why? It’s because of the defensive nature of the world’s reserve currency. People flock to the greenback when times are uncertain and they shun it when economies are growing and expanding nicely.

Well, as you can see from the chart of the dollar above… money is still on the defensive as more money pours into the dollar for now. Until that changes, there is no market bottom for stocks.

However, once these indicators make their important turns, it means that a bottom is being forged and the risk-seekers are returning.

And when all of that happens, there will be some great, fundamentally strong foreign currencies at fire-sale prices – and then it will be the time to start snatching them up.

Opportunity in Commodity Currencies

When these indicators make their important turns, it will be time to snatch up commodity-currencies like the Australian dollar (AUD), Canadian dollar (CAD) and the New Zealand dollar (NZD).

But for now, it’s time to be patient…watch these indicators for a turning point. Once that happens, you’ll want to start nibbling away at fundamentally superior currencies and once again flee the buck.

Have a Nice day!

Sean Hyman, Editor
Currency Cross Trader

P.S. Investing in commodity-currencies like the Australian dollar, Canadian dollar and the New Zealand dollar is absolutely the right strategy at the right time. That’s our specialty at Currency Capitalist. Our mission is to uncover new ideas – such as the little-known “unclaimed” dividend program, which, for years, has quietly allowed many of Washington’s elite to rake in a substantial side income. To learn about new opportunities and to find out more about unclaimed-dividend plays, click here.

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