From the Desk of Ian Culley
Choppy conditions prevail.
Sure, risk appetite is returning as long-duration assets catch a bid.
The ARK Innovation ETF $ARKK, Tesla $TSLA, and even the Emerging Markets Bond ETF $EMB show impressive near-term strength.
Nevertheless, the overall market is still a range-bound mess…
The S&P 500 churns below overhead supply. A decisive downside resolution in the US Dollar Index $DXY has yet to occur. And commodities – at least at the index level – refuse to violate key support levels.
I doubt the markets will clean themselves up in the coming weeks. But if you want insight into the near-term direction of the major asset classes, keep an eye on this one chart…
Here it is – a triple-pane look at the yields on the five-, 10-, and 30-year US Treasury bonds:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2023/01/image830.png)
It’s all about the polarity zone marked by last year’s June highs and December lows. This is a critical level.
Whether rates undercut those former highs or dig in and catch higher will have broad implications.
If rates roll over, long-duration assets will likely continue to rise.
Our bullish bond trades are working, and growth stocks are printing fresh recovery highs in this environment.
On the flip side, if yields turn higher, more pain lies ahead for risk assets – at least growth names.
Bonds resume their ongoing structural downtrend. And the bottoming process for major US equity indexes meanders.
Remember, “sideways” is always an option. It’s what we’re experiencing today.
And – guess what – markets seem to like it.
Bottom line: Now is not the time to make directional bets at the index level, be it stocks, commodities, bonds, or even the US dollar.
Instead, you want to find those pockets of strength and the names printing fresh highs on absolute and relative terms.
That’s always the game plan.
But whether yields hold their crucial levels will determine where we look and how we execute.
Stay tuned.
Countdown to FOMC
Following the recent double-hike, the market is pricing in a single-hike at the February meeting.
Here are the target rate probabilities based on fed funds futures:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2023/01/image829.png)
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of January 26, 2023.
Thanks for reading. As always, be sure to download this week’s Bond Report!
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