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Bearish yield curve inversion may be putting investors on the wrong track

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A bearish market indicator may be putting investors on the wrong track

A new chart shows a bearish indicator is not so bearish after all.

According to Avalon Investment and Advisory's Bill Stone, when the 10-year Treasury yield falls below the 2-year rate, stocks are up on average by 9.2% a year later.

Stone draws the conclusion based on the relationship between the S&P 500 and the inversion.

"I looked at six of the last inversions of the yield curve, the 2s and 10s. And, what it really tells you is this inversion is a really bad stock market timing tool," the firm's chief investment officer said Monday on CNBC's "Trading Nation."

Stone's chart tracks the six instances between 1978 and 2005 when the 10-year and 2-year actually closed in inversion territory. It's widely considered a more dire phenomenon than what Wall Street saw Wednesday, when the inversion happened briefly during trading.

"If you kind of think about the worst case scenario and best case scenario, 1980 was the worst, at down about 5.5%," said Stone. "1988 was the best, at up 28%. So, certainly skewed to the upside."

By Monday, the spread was at its widest level since Aug. 12.

But that doesn't necessarily mean the U.S. economy is completely out of harm's way. Stone believes the yield-curve may not be a good way to track stock market declines, but it could provide a clue into when a recession will hit.

"It has a very good track record of predicting recessions. The hard part with it though is how long it takes to get there. I would say on average it's about 18 months to get to the recession," he added. "It is telling you what you need to know which is the economy and global economy is in fact slowing."

Yet Stone, who's responsible for $8.9 billion in assets under management, isn't inching closer to the recession camp. His S&P 500 year-end forecast is 3,025 — 3.5% above Monday's close.

He expects market volatility will calm once the Federal Reserve gives the Street indication that two more interest rate cuts are coming.

"It's almost a sure thing that they ease in September here. We think by 25 basis points," Stone said. "Then, you probably get another ease late in the year for another 25 basis points."

VIDEO4:3604:36
This trend suggests you can't use the inverted yield curve to time the market