by Tim Morris
The Crash Signal
The One Signal That Predicts a Stock Market Crash
By Tim Morris
Copyright © 2018
All Rights Reserved
The Crash Signal®
CONTENTS
Title Page
About the Author
Part 1: Market Crashes
Part 2: The Signal
Part 3: During The Crash
Part 4: Getting Back In
Part 5: Where to Trade
Conclusion
Disclaimer
This book is written for informational purposes only. By purchasing this book, you agree to NOT give any of the strategy presented in this book away in the review section of Amazon. Any reviews with information related to this strategy will be reported to Amazon and deleted.
The creator of this book is not an investment advisory service, a registered investment advisor, or a broker-dealer and does not advise clients on which securities they should buy or sell for themselves. It must be understood that a very high degree of risk is involved in trading stocks. The publisher of this book, and the affiliates of the publisher assume no responsibility or liability for trading and investment results. It should not be assumed that the methods, techniques, or indicators presented in this book will be profitable nor that they will not result in losses. In addition, the indicators, strategies, rules and all other features of the information presented are provided for information and educational purposes only and should not be construed as investment advice.
Examples presented are for educational purposes only. Accordingly, readers should not rely solely on the information in making any trades or investments. Rather, they should use the information only as a starting point for doing additional independent research in order to allow them to form their own opinions regarding trading and investments. Investors and traders must always consult with their licensed financial advisors and tax advisors to determine the suitability of any investment. The author and publisher have no affiliation with Discover Bank, Ally Bank, Robinhood, Webull, or TC2000. The author receives compensation for the affiliate links used in the book. The Crash Signal is trademarked® and copyrighted 2018 with all rights reserved.
About the Author
Tim Morris has been trading and intensively studying the stock market for the last 12 years. Like most new traders, Tim initially lost money and was met with failure. However over the years he has refined his trading by constantly studying and learning, and has in turn become a highly successful stock trader. Tim trades options, day trades, swing trades, and invests for the long term. If you have any questions for Tim, or would like to get on his email list for discounts on upcoming books, please email him at [email protected].
**NOTE: As stated in the disclaimer, even if for some reason you don’t like this book, do not place any of this strategy in the review section of Amazon or risk being reported to Amazon and having your comment deleted. Thank you.
Part 1: Market Crashes
Market crashes can be devastating to your portfolio. On average, a stock market crash occurs every 8 years. However this is just an average and there isn’t an actual exact timeframe. No one knows exactly when a crash will happen, and even the most experienced stock investors and hedge fund managers get caught in crashes.
The stock market can be profitable over a long term time frame, but buy at the wrong time and your money is toast. Had you bought the S&P 500 at the height of the 2000 bull run, you’d have lost about 48% of your portfolio in the upcoming crash.
S&P500 - 2000 Stock Market Crash
Then when you finally gained back your money (and sanity) in 2007, you’d have to deal with yet another stock market crash which would have erased over 50% of your portfolio!
S&P500 - 2007 Stock Market Crash
And had you invested in the NASDAQ it would have been even worse. Let’s say you got into the NASDAQ at it’s high in 2000, you’d have lost over 80% of your money, and it would have taken 17 years to make it back! Talk about a tough time.
NASDAQ- 2000 Stock Market Crash
Why does it have to be like this though? Why can’t you have your cake and eat it too? What if you could invest in the stock market, reap all the benefits, and completely avoid the crashes that take all your hard earned money. Or even better yet, make money from the crashes! I’m here to teach you how to do just that.
Part 2: The Signal
There is a signal that has preceded every stock market crash since World War II. Within 6 months to 2 years of this signal flashing, the stock market has crashed. And I’m not just talking about slight corrections, but full-fledged bear markets. So what is this signal? Let’s take a quick look at the bond market.
Bonds are debt securities issued by a corporation or the government. When an individual buys a bond, they are providing the issuer a specified amount of money in exchange for payment back at a later time with interest. You could classify this as a small loan. The bond “yield” is the amount, in a percentage, that is the interest received on the loan. Government issued bonds are called Treasury bonds. Different Treasury bonds have different lengths of time in which the government repays the bond with interest. Treasury bond lengths range from 1 month to 30 years.
Throughout much of history, longer term length bonds have paid more than shorter term length bonds. This only makes sense. If you’re letting someone borrow your money for 5 years versus only 1 year, you’d expect a higher rate of return for your money. When charted, this “yield curve” slowly progresses upward as shown in the picture below. This represents the longer term bonds paying more than the shorter term bonds.
However at certain times, bond yields start flattening or inverting. This means the government starts paying you the same amount of interest, or even less interest, for a bond with a longer term time frame, versus a shorter term one. The chart below shows an example of an “inverted” yield curve.
There are many reasons that the yield curve changes which can get very complicated. Factors like inflation, Fed rate hikes, supply and demand from investors, and US government fiscal policy all can affect the shape of the curve. The key takeaway here is though that the inverted yield curve has been an excellent predictor of an economic recession and coming stock market crash for over half a century. It indicates that future economic outlook is seen as unpredictable, or even poor, compared to the shorter term outlook.
While any inversion in bond yields is important to consider, one in particular has stood out since 1955, and that is the 2 year and 10 year Treasury bonds.
Since WWII, every stock market crash has been preceded by an inversion, in which the 2 year Treasury bond yielded a higher interest rate than the 10 year Treasury bond. Let me show you an example.
The chart below tracks the 10 year and 2 year Treasury bond yields since 1975. When the blue line gets below 0 percent on the chart (as shown with the drawn arrows), it indicates the 2 year bond had a higher yield than the 10 year bond. The grey vertical bars throughout the chart indicate when a recession took place. As you can see, any time the blue line went below the 0% mark, even by a hair, a recession took place soon after.
And as you can see from the chart, there are no “fake-outs”; the recession actually took place soon after. This signal has preceded all nine US recessions since 1955. After the signal has flashed, a recession has come within 6 months to 2 years.
Let me show you a couple more specific examples. First, let me show you a picture of the bond yields from 2000, to show you the exact day The Crash Signal flashed.
2000 Treasury Bond Yields
The chart above is from the government's official website, www.treasury.gov. As you can see in the chart above, the 10/2 bond yields inverted on February 2nd, 2000. L
et me present to you a chart showing you what would have happened had you gotten out of the market when this signal flashed. The chart below is the S&P 500 from the year 2000.
2000 S&P Crash w/ The Crash Signal
As you can see in the chart, The Crash Signal flashed just a little before the S&P hit it's high in 2000. And just seven months after the signal flashed in February 2000, the recession started.
Now let me show you a picture of the bond yields from the year 2006, to show you the exact day The Crash Signal flashed during the following stock market crash.
2006 Treasury Bond Yields
Again, the chart above is from the government's official website, www.treasury.gov. As you can see in the chart above, the 10/2 bond yields inverted on January 31st, 2006. Let me present to you a chart showing you what would have happened had you gotten out of the market when this signal flashed. The chart below is the S&P 500 from the year 2007.
2007 S&P Crash w/ The Crash Signal
During this recession, The Crash Signal flashed a little earlier than it had in 2000. In January 2006, The Crash Signal flashed and then just over a year and a half later in October of 2007, the recession started.
As this book is being made in 2018, the bond yields are starting to flatten. In the chart below are three lines. The bottom line is the yield curve in 2016, the middle line is the yield curve in 2017, and the top line is the yield curve in 2018.
2016, 2017, 2018 Bond Yield Curve
If we look at current times here at the end of 2018, we can see the yield curve is getting very flat. While this doesn’t necessarily mean we’ll have a recession, it is indicative of a coming inverted yield curve, at which point a recession is more than likely, based on what history has shown us.
Thanks to the internet and how accessible information is, there is now a way to view the current bond rates straight from the government. The link to a website below allows you to view the current yield rates for all government bonds.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
If you look at circles drawn on the chart above, you’ll see that the 2 year bond yield is already higher than the 5 year bond yield. You’ll also see that the 10 year yield is getting dangerously close to going below the 2 year yield, which is when the inversion happens. I recommend checking this page at least once a month to look for The Crash Signal and stay up to date with current bond yields.
Part 3: During The Crash
So what should you do when you see a 2/10 year Treasury bond inversion? You have two options.
A) Go Into Cash
If you decide to go into cash, a good idea is to put the money into a high yield online savings account. You never want to hold large quantities of cash in just a regular checking account or under your mattress due to inflation. Since 1971, when Nixon took the United States off the gold standard, money is no longer backed by a commodity, but by the “word of the government”. While I don’t agree with having the Federal Reserve, which is a centralized private bank which controls our money supply and thus is able to print money at will and cause inflation, there’s not much we can do about it. For this reason, inflation will eat away at your money if it’s not invested somewhere. Discover Bank and Ally Bank have excellent high yield savings accounts which currently pay 2% interest a year. Unlike a CD or bond, you’re allowed to touch this money anytime, so it’s highly liquid in the case you need it.
The brokerage firm Robinhood will be introducing a 3% yielding checking and savings account in the near future. This account has no minimum or yearly fees. This is the best yielding account I have seen in current times. If you decide to open up a Robinhood account, you can use the link below to receive a free stock valued up to $1000 just for signing up!
Link shortened for your convenience:
https://goo.gl/vx1PZn
If you’re unfamiliar with the Federal Reserve and how a private bank was put into place in 1913 to control the money supply of the United States government, I highly recommend you do more research of your own online. If enough people understand how corrupt this system is, maybe one day it will be changed.
B) Short The Market
For the more aggressive, risk taking investor, you can make money from a tumbling market. Now again, a market crash can take anywhere from 6 months to 2 years to happen after The Crash Signal appears. For this reason, I would not suggest shorting the market when you first spot The Crash Signal. I would first go into cash when The Crash Signal appears, and then wait for another signal known in the industry as the “death cross” to start shorting.
The “death cross” forms when the 50 SMA crosses below the 200 SMA on a stock chart. Considering the S&P 500 paints a broad picture of the overall market, I would suggest waiting for the death cross to appear on the daily chart of the SPY ETF as a gauge of when to short (the SPY ETF correlates with the S&P 500).
Let me show you an example of what would have happened had you used to death cross strategy in the last two stock market crashes.
As you can see from the chart, you would have been able to gain almost all of the downside while shorting with the use of the death cross strategy. Quite impressive!
During crashes, the first companies to fall out are the small caps. This is because small caps are considered riskier investments and people don't want to be holding risky stocks during a crash. Small caps are companies valued at $300 million to $2 billion, as opposed to more well-known large-cap companies which are valued at $10 billion or greater.
Because the small caps get hit the hardest, I would suggest waiting until you see the SPY death cross appear. Once this happens, I would short the market by buying an inverse ETF which mirrors the small-cap indexes. Inverse ETF’s go in the opposite direction of the market, meaning when the market goes down, these ETF’s go up. And when these ETF’s go up, you make money. A good inverse ETF which will do this has the ticker RWM. This is a non-leveraged, inverse ETF which mirrors the Russell 2000 (the Russell 2000 tracks the top 2000 small-cap companies in the stock market).
And for the more aggressive investor, there is a 3x leveraged inverse ETF with the ticker symbol “TZA” which mirrors the Russell 2000. TZA is a 3x leveraged ETF, meaning when the Russell 2000 goes down 1%, this ETF goes up 3%. And with more risk, comes more potential reward.
Something to note is the “death cross” is not perfect, and there can be "fake outs" with this strategy. So if after a death cross appears the 50 SMA crosses back above the 200 SMA, that is a good time to get out of the short position. However if The Crash Signal has appeared, and then you see a death cross on the daily SPY chart, there is a fairly high chance the market will fall and you can use this as an opportunity to make money.
Part 4: Getting Back In
If you decide to go into cash or short, there is a signal known in the industry as the "golden cross" which would be considered safe to get back long into the market, and for the most part show that the crash is over.
The "golden cross" forms when the 50SMA crosses above the 200SMA. This is a lagging indicator, and the market bottom will have already formed so you will miss out on some of the gains, however it’s very safe and there is still much market left to make money from.
Let me show you an example of the golden cross from 2000 as well as 2007 to show you the potential gain had you used this strategy.
As you can see from the chart, you save yourself from the entire market crash by using The Crash Signal, and then you gain almost all of the upside by getting in at the golden cross. It's a win, win situation!
And had you shorted the market with the death cross, then switched back to being long once the golden cross appeared, here is what that chart would have looked like.
As you can see, there is quite a bit of money to be made in both the bull and bear markets once you know the right signals to look for.
Part 5: Where to Trade
For investors looking for an easy to use, commi
ssion free broker, I highly suggest using Robinhood. It’s accessible on your phone, as well as your computer, and is completely commission free, including for option trading. They also will soon be introducing that high yield 3% checking and savings account, which can be quite beneficial for when you go into cash. Something else to note is you are not required to trade stocks to open a checking or savings account with this firm. I have a link below which if used, provides a stock valued up to $1000 for free, just for signing up!
Link shortened for your convenience:
https://goo.gl/vx1PZn
For those traders looking for a more professional platform meant specifically for the computer, I highly recommend a software called TC2000. While TC2000 has a brokerage option too, just having the software can help dramatically with your stock trading career. It's where I do all my stock research, and where I was able to garner the information for this book.
