Bonds scream “recession”. This is great news for One Top Sector.

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An inverted yield curve signals a recession

Source: Shutterstock

On December 22, 1997, the 10-2 year Treasury bond yield spread fell to near zero, causing panic among academics. The “bond reversal” indicator has predicted every recession since the 1950s.

But few investors noticed.

Instead, tech startups like Amazon (NASDAQ:AMZN) would continue to party like college kids at a frat night. Shares of the e-commerce startup would rise 189% over the next 6 months. Capital one (NYSE:COF), an indicator of retail spending, also saw its stock rise 116% over the same period.

Although the tech bubble would eventually end in a massive correction, it turns out that inverted yield curves usually warn of recessions. much too soon.

You do not believe me ?

Consider the next time the spread hits near zero in December 2005. The best performing stocks over the next 6 months were energy and agricultural stocks, continuing their winning streak on Chinese demand:

  • BP Prudhoe Bay Trust (NYSE:BPT). +289%
  • Enservco Corp. (NYSEAMERICAN:ENSV). +194%
  • Marine Oil Trust (NASDAQ:MARPS). +176%
  • LSB Industries (NYSE:LXU). +176%

The reversal that followed in August 2019? Biotechs are the big winners:

  • ChemoCentryx (NASDAQ:CCXI). 605%
  • Kodiak Science (NASDAQ:K.O.D.). 480%
  • Applied therapy (NASDAQ:APLT). 418%
  • Immunitybio (NASDAQ:IBRX). +392%

In each of these cases, the inverted yield curves were like the investor shouting “bear market!” Warn of a non-existent recession for long enough, and people will eventually ignore you like a professor trying to teach a Finance 101 course at a March Madness game.

Today, there are already signs that history is repeating itself. Last week, Bitcoin (BTC-USD) erased its 2022 losses and GameStop (NYSE:EMG) is almost $200 again.

Even corporate bigwigs like AMC Entertainment (NYSE:CMA) CEO Adam Aron ignores the signs. On Monday, the 67-year-old said the movie company would pursue more “transformational” deals in addition to his purchase of a gold mine penny stock. Its shares nearly doubled in the past week.

There’s no doubt that inferior choices will eventually become bear food (imagine your finance professor saying, “I told you so”). ChemoCentryx and Kodiak Sciences saw their shares drop 85% after their meteoric rise in 2019. And companies like AMC will eventually have to deal with their lack of cash. Historically, no bull market has survived more than 3 years after a bond reversal.

But not all hot stocks are doomed. Amazon would eventually win despite the dot-com crash, and Capital One continues to earn more than its peers.

Today, we’re going to take a look at a group of Moonshots that will work today, in an overheated economy, and tomorrow, in any fallout from the bear market: green energy stocks.

An illustration of an astronaut sitting on a swing shaped to look like a crescent moon supported by two stars.

Source: Catalyst Laboratories / Shutterstock.com

The green energy revolution is here. High quality will win.

Past bond reversals typically trigger bull runs in the day’s “hot stocks”.

Tech… Energy… Biotech…

So what is the law industry to buy now?

It’s a flurry of interest from retail investors today with enough secular headwinds to survive the potential pullback: alternatives to fossil fuels.

Premium Moonshot Pick: Cameco (CCJ)

Canada’s top uranium miner should come as no surprise to regular Moonshot readers. The company is located in three of the most productive mines in the world, giving it an unbeatable cost advantage.

Now Cameco (NYSE:CCJ) has another reason to celebrate: the abandonment of Russian energy.

Russian and Kazakh companies produced almost half of all uranium exported in 2021. With sanctions expanding day by day, traders are scrambling to find alternative sources of fuel.

Cameco’s Saskatchewan-based mines fit the bill.

The rise of small modular reactors (SMR) is also renewing interest in safer nuclear energy. A design pioneered by Oregon-based NuScale stands just 65 feet tall with the width of an SUV. These smaller plants allow for faster building and provide an essential backup when the wind isn’t blowing or the sun isn’t shining.

SMRs also have significant security advantages. Smaller reactors generally house only one twentieth nuclear fuel from a typical 1,000 MW reactor, making them safer to run and much less dangerous in the event of failure.

While the commercial use of SMRs may remain for years to come, the rise of energy nationalism has thrust this Moonshot technology to the fore. So, while oil prices may fall, don’t expect nuclear to disappear so quickly.

Speculative choice: Vestas Wind Systems (VWDRY)

Meanwhile, the race for European energy independence propels the largest wind turbine manufacturer on this continent into the limelight.

Based in Denmark Vesta (OTCMKTS:VWDRY) has been experiencing stiff competition since 2017. Returns on fixed assets fell from more than 40% in 2016 to 4% due to a declining order book and rising costs. Installed MW fell by 19% in 2021.

Russia’s invasion of Ukraine completely changes the calculus. Germany now plans to achieve 100% renewable energy by 2035, nearly two decades ahead of schedule. Even Poland, a traditional coal-consuming country, announced in early March its intention to cut approval times for wind projects by two-thirds. They now hope to double the share of renewables by 2040.

It’s… well… a godsend for Vestas. Not only will the company benefit from the installation of new capacity, but its services business will also gain as more of its turbines are brought into service. It’s a virtuous circle where today’s sales lead to greater future profits.

As governments around the world rethink their renewable energy strategy, Vestas looks set to deliver a 40-50% gain.

More green energy choices

My colleague Luke Lango has not remained inactive either. In his latest presentation, he talks about a $3 stock that powers the next generation of electric vehicles.

It is a company that people need to know. Renewables like wind and solar are creating an arms race in energy storage technologies, and it’s still a game that anyone can win.

To view the video, please click here.

When will a crash occur?

Inverted yield curves are not necessarily cause recessions.

“We find that an easing of monetary policy, reflected either by a decline in the current level of real interest rates or by a decline in the expected real interest rate differential, is associated with an increase in the probability of a recession over the next year,” the researchers explain. at the Chicago Federal Reserve. In other words, inverted yield curves are just one indication of the root cause of a recession: too loose monetary policy.

It is the same force that created our current markets. High asset prices… inflation… rampant speculation… and a growing sense that the party will never end.

This is also why the Hourly recessions is so hard to predict. Much like relying on your dog’s behavior to predict earthquakes, using yield curves to predict recessions is akin to relying on tangential evidence.

Yet there is some clues.

The first is trading volume, a sign of market depth. Trading volumes are already slowing for million-dollar NFTs – a warning that the tokenization market is reaching saturation. Meanwhile, triple-leveraged ETFs continue to see record inflows, suggesting stocks still have room to manoeuvre.

The second is the Fed, the ultimate wet blanket on a stock market night. In October, I noted how Fed Chairman Jerome Powell was becoming hawkish faster than most investors realized; the S&P500 and Nasdaq would fall into a bear market soon after. Now that Mr. Powell has backtracked, it’s a sign he’s willing to let inflation rise in exchange for delaying a recession.

Finally, we have house prices, a proxy for investor confidence. With house prices and rents continuing to accelerate, homeowners feel ever richer. A sudden reversal would spell trouble.

Together, these three signals always point to a blue sky ahead of us. But once the clouds start rolling in, make sure you have an umbrella. It will be a big storm coming.

PS Do you want to know more about cryptocurrencies? Penny shares? Choice ? Drop me a note at moonshots@investorplace.com or connect with me on LinkedIn and let me know what you’d like to see.

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As of the date of publication, Tom Yeung had (neither directly nor indirectly) any position in the securities mentioned in this article.

Tom Yeung, CFA, is a Registered Investment Advisor on a mission to simplify the world of investing.