From the Desk of Ian Culley
Markets don’t always trend higher or lower. In fact, traders often deal with churn – which sometimes is nothing more than a range-bound mess.
"Sideways" is a trend that's all too easy to forget after last year’s historic volatility. Even bonds became risk assets in 2022!
I found it odd when bonds failed to react to last week’s rate hike along with other long-duration assets.
But the lack of bond market volatility might be exactly what risk assets, especially stocks, need right now.
Check out the chart of the US 10-year yield:
The US benchmark rate continues to hold above 3.40%. This has been our line in the sand for months, coinciding with the June pivot highs from last year.
The market has proven the significance of the level. More importantly, the near-term trend is turning sideways. Notice the 14-day average directional movement index (ADX) cracking below 20 in the lower pane.
I use ADX to monitor trends. A reading below 20 signifies a trendless market that’s contracting.
So rates aren’t ripping in either direction. What’s wrong with that?
Remember when bonds were a haven for risk-averse investors? Or when they provided some sense of security with the classic 60/40 portfolio?
Those were good times, because less volatility across the bond market benefits bonds and stocks.
The overlay chart of the S&P 500 $SPY and the Bond Volatility Index $MOVE (inverted) tells the story:
SPY experienced strong rallies during 2019 and 2020-21 as the MOVE index churned sideways.
On the flip side, stocks fell under increased selling pressure as bond market volatility began to pick up in late '19 and '21 (inverted line trending lower).
It’s obvious: Risk assets need to be the hot ticket on the street. If bonds are receiving all the attention, ripping in either direction, it likely implies systemic risks for the overall market.
But that’s not what we’re witnessing today. Bond market volatility is declining. We have to view this as a positive development for stocks, even though it might be suspect.
When I look at SPY and the MOVE index (inverted), I see two charts carving out big smiley faces – the kind of charts you want to buy!
Stay tuned!
Countdown to FOMC
Following last week's 25 bps hike, the market is pricing in another single-hike at the March meeting.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of February 9, 2023.
Thanks for reading. As always, be sure to download this week’s Bond Report!
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