A Market Correction Is Coming… These Three Charts Can Help You Time It

CHISWICK, WEST LONDON – My current thinking on the stock market and the economy goes something like this…

We are in the final stages of a sugar rush which began in March 2020. The stimulus is wearing off. A sizable stock market correction is coming.

Today I’ll show you three of my favorite boom-bust indicators to see where we stand…

(More below.)

London Mission (Nearly) Complete

Greetings from London…

Here in London, we have no car. So we get around by bicycle.

Penny (8) isn’t strong enough to propel herself through London’s busy streets on a bicycle, so Kate and I both have cushions over our back wheels like a Rwanda bicycle taxi and Penny sits behind us.

Here are Kate and Penny…

We’ve nearly completed our mission in London. And we’re getting ready to hit the road again.

Our next adventure will be a road trip across the United States. We depart in October.

Today, we visited the U.S. Embassy in London to get a new passport for Miles. The whole process took about an hour. We should have the new passport in about three weeks.

The staff told us that it’s quicker to renew a U.S. passport in London at the moment than it is to renew a U.S. passport in the United States.

Here we are outside the U.S. Embassy in London…

Three New Ways to Time Our Exit

Back to the boom-bust cycle…

As longtime readers know, one of my favorite ways to track the boom-bust cycle is with the Dow-to-Gold ratio.

The Dow-to-Gold ratio tells us when stocks are expensive relative to gold and vice versa. We use it as a “barometer” to know when it’s best to sit on the sidelines in gold… and when it’s safe to return to the financial system (including stocks).

But it’s not the only boom-bust indicator I follow…

On Monday, I showed you a new indicator I’ve been tracking – what we call the “real risk-free rate,” going back 700 years. (Catch up here.)

Today, I want to show you three other charts that can help us time our exit out of gold and back into stocks.

First, keep an eye on the chart below. It shows the annual change in the level of margin debt on the New York Stock Exchange, the world’s biggest stock market.

And it’s warning us that there could be trouble ahead for the stock market…

The grey lines show 20% declines in the S&P 500. Notice that sudden declines in margin debt were a timely indicator of declines in the S&P 500 in 2000 and 2007.

Now, take a look at this next chart below. It shows credit spreads…

A credit spread is the difference in yield between two credit instruments. In this case, it’s the difference between U.S. Treasury bonds and junk bonds. This is one of my favorite indicators of stress in the financial system.

When the chart is low, it shows that the difference in yield between junk bonds and Treasury bonds is narrow. When the financial system feels stress, the spread tends to blow out as credit investors dump junk bonds and rush for safety in Treasury bonds. 

Credit spreads were recently at their narrowest levels in history. But as you can see above, we could be seeing the very beginning of a trend reversal…

Our third and final chart shows another one of my favorite boom-bust indicators. It’s the Industrial Commodities-to-Gold ratio…

When the line on the chart is high, it means industrial commodities are outperforming gold. When the line is low, it means gold is outperforming industrial commodities.

In times of financial stress, gold tends to perform much better than industrial commodities. That’s because commodity investors exit bets in energy and industrial metals and rush for the safety of gold.

Above, you can see industrial commodities have been falling in terms of gold since 2007. But the ratio rebounded in March 2020 when the feds turned on the stimulus.

There is no new downtrend yet, but it looks like the rally in industrial commodities might be running out of steam. If that’s the case, it could mean lower Dow Jones and S&P 500 prices ahead…

What do I take away from these boom-bust indicators? The next stock market correction may be on its way, although it’s too early to say for sure.

But that’s not the full story. If a correction is coming, it’ll only cause the feds to ramp up stimulus again… and cause another sugar rush…

What’s an investor to do? More on Monday…

– Tom Dyson

Readers offer the Dysons homeschooling advice, based on their own experiences…

Reader comment: I am 67 and was homeschooled. I had a Martin Scorsese sickly childhood and spent too many years enrolled in school but too sick to attend. As a result, I didn’t learn to interact naturally with the other kids. Although I was well-liked, I never quite got them, and they didn’t get me. My career life was basically from home as a freelancer, again not playing with others.

Although I am a journalist/speaker/trainer/impresario/community investment specialist making things happen… I am alone. I live alone and the thought of living in a senior residence is just too socially overwhelming. I am a private person who chooses carefully with whom and where I associate.

For anyone who is thinking about homeschooling beyond COVID-19, I would suggest you form a network with other homeschool parents to provide social integration opportunities, including social and physical training events. Even playdates or luncheons as they get older… make sure homeschooling doesn’t mean isolation schooling.

Reader comment: Tom, in one of your recent postcards, a reader wrote…

“The one major danger I see with homeschooling is that the children’s thinking will be strongly weighted towards what their parents think and say (even if it’s not overt). Of course, the parents will always believe their thinking is the correct analysis, and this will carry over to the children.

“I see this very clearly with regard to religious affiliations. Religion is, and always has been, a cultural/social phenomenon that is considered by adherents to be immune from critical thinking. “Exposure to school teaching is certainly not by itself the answer since biases there will also prevail.

“Children need to be taught to focus on independent critical thinking, both with regard to their parents’ points of view as well as societal and school biases. This is likely to be a hard thing for homeschooling parents to swallow.”

That’s exactly why homeschooling is the only decent way to educate a child today. I had a real public-school education including Latin and factual history. My brilliant and very successful outward appearing sons did not receive the same gift from the United States as you are giving your offspring.

Tom’s note: As always, thanks for your messages! Please keep writing to me at [email protected], and I’ll do my best to answer your questions in a future Friday mailbag edition.