From the Desk of Ian Culley @IanCulley

US bank stocks big and small took a beating Thursday, with the Bank ETF $KBE posting its largest single-day decline since 2020.

The steep sell-off came on the heels of Silicon Valley Bank’s $SIVB Wednesday announcement of a $1.8B loss, mainly due to accepting unrealized losses in US Treasuries.

Based on SIVB’s acute exposure to the tech industry, you can argue larger banks with more diversified portfolios and clients don’t carry the same risk. And they don’t.

Regardless, the next chart reveals a storm brewing beneath the surface...

Check out bank stocks (KBE inverted) overlaid with the US Treasury 2s10s spread:

I inverted KBE to highlight the strong relationship between banks and the yield curve. The two lines look almost identical over longer timeframes.

The main takeaway: Banks do not fare well when the shorter end of the curve outpaces the longer end.

Why? They hold heaps of government debt across the curve – especially shorter durations. 

From the Desk of Ian Culley 

Markets churn sideways, plagued with indecision. But one thing is certain…

The global rising rate environment remains intact.

Developed European benchmark interest rates are posting fresh highs. Those potential failed breakouts back in early January have quickly turned into nothing more than false or premature moves.

And while US yields continue to climb, their recent rise pales compared to their European counterparts.

What does that imply for domestic rates in the coming weeks and months?

For the past year and a half, we have turned to developed European yields for insight into the direction of domestic interest rates. 

The analysis proved insightful as the rising rate environment has been global in scope. Europe has given a nice heads-up regarding the direction of yields stateside. And the market continues to support this approach. 

Check out the German 10-year yield:

...

From the Desk of Ian Culley 

Rates continue to rise along with concerns of an impending recession.

The narrative is quickly shifting back to tighter monetary policy following last week’s higher-than-anticipated CPI and strong economic data. I don’t pay too much attention to this gossip. But I do keep a pulse on the latest discourse surrounding markets.

With these newfound recessionary fears circulating, I want to share a chart I like to avoid… The 2s10s treasury spread.

I can’t remember the last time I wrote about the yield curve. It’s been so inverted (deepest inversion since the early 80s) for so long that I honestly don’t know what to think.

Nevertheless, the overlay chart of the Staples sector $XLP relative to the S&P 500 $SPY with the 2s10s spread conveys an important piece of information:

Despite an inverted yield curve, the relative downtrend in staples remains intact. 

Why does this matter?

Defensive leadership (a...

From the Desk of Ian Culley 

I prefer to focus on price when analyzing markets. 

It’s what pays us at the end of the day. And it bakes in all the news and lagging economic data I tend to ignore.

A few weeks ago, I urged investors to track trends, not inflation.

Honestly, I was only half serious. I pay attention to the Fed and CPI data – mainly to stay aware of the increased volatility accompanying important release dates. 

But price is king. And when I look at my charts, the narrative of easing inflation appears suspect...

Check out the overlay chart of the Metals and Mining ETF $XME and the TIPs vs. US Treasuries ratio $TIP / $IEF:

These two charts move tick for tick at first glance. And a closer look at the lower pane reveals an overwhelmingly positive correlation over the trailing 126 trading days. This is why we focus on XME.

The tight correlation...

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...

From the Desk of Ian Culley

The FOMC handed down the expected 25 basis point rate hike yesterday. Yet markets didn’t react until Fed Chair Jerome Powell spoke 30 minutes later.

That's right, he dropped the D-word – “disinflation.”

To be clear, I don’t care what he said. Instead of hanging on the Fed Chair's words, I prefer to focus on the markets. I find it more enjoyable.

But, boy, did markets respond!

The most striking aspect of yesterday’s reaction was highlighted by the relative strength of growth stocks.

Check out the overlay chart of the US T-Bond ETF $TLT and the ARK Innovation ETF $ARKK:  These charts tend to move tick-for-tick, as long-duration assets benefit from the same market environment.

It doesn’t matter that one ETF holds the largest tech names across the market while the other a basket of long-term US Treasury bonds. 

Whatever Powell said in addition to “disinflationary,” investors heard...

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:

It’s all about the...

From the Desk of Ian Culley

It’s impossible to ignore – investors are reaching for risk.

Biotech stocks are catching higher. Copper futures are working on their tenth up-day in a row. Even the Emerging Market HY Bond ETF $EMHY is breaking to 7-month highs as it completes a multi-month base. 

And don’t forget about Silver! Gold’s crazy cousin has proven by far the best-performing asset since the US dollar peaked last fall. Strength among these market areas indicates a healthy risk appetite.

I can’t overlook these signs of a constructive bottoming process, especially considering the next chart…

Check out the Emerging Market Bond ETF $EMB relative to the US Treasuries ETF $IEF:

There’s plenty to unpack here…

First, the EMB/IEF ratio is challenging fresh 7-month highs after posting a higher high and a higher low last fall. A bearish to bullish trend reversal is underway for this important risk-on ratio.

You can add this to the growing list of...

From the Desk of Ian Culley

If bond markets aren’t stressing, why should we be?

They’re the largest markets in the world. That’s why we constantly monitor credit spreads for signs of structural weakness and elevated risk.

But, as of now, we’re not seeing the slightest hint of impending catastrophe.

Despite the doom-and-gloom headlines popping up in your inbox and financial media talking heads spinning an imminent recession…

Credit spreads around the world are sending a clear message: "Relax."

Check out the overlay chart of option-adjusted high-yield credit spreads:

They’re all contracting to levels from last summer. Even the riskiest CCC-rated spread is reverting lower.

This is the exact opposite of what we would expect if the world was coming to an end and investors were running for the exits.

Instead, market participants are reaching...

From the Desk of Ian Culley @Ianculley

Whether you’re looking across the curve or around the world, interest rates continue to rise.

Benchmark rates in Germany, France, Spain, and Portugal hit fresh multi-year highs last week. Interestingly, the US 10-year yield did not. And neither did the two-, 5-, or 30-year yields.

I’m not claiming US yields have put in a lower high. It’s far too early to assume that. A downside resolution below last month’s pivot lows needs to materialize before making that claim.

Nevertheless, the lack of confirmation from US interest rates is intriguing, especially as European yields turn lower this week.

Check out the triple-pane chart of Developed European 10-year yields (Germany, France, and Spain):

All three broke above their respective Oct. highs, finishing 2022 on a high note. But those breakouts were short-lived as yields are sliding lower this week. 

The lackluster moves from European yields suggest...

From the Desk of Ian Culley @Ianculley

Bonds have endured quite the year.

Perhaps 2022 marks the worst on record, or at least the past 100 years. Nevertheless, we’ve all witnessed extraordinary selling pressure in what has historically acted as a safe-haven asset. 

Despite the dismal returns and destruction of the traditional 60/40 portfolio, the bond market continues to instill valuable lessons in those willing to listen and learn.

Check out these three poignant reminders courtesy of the bond market…

Trends Persist

It’s an oldie but a goodie. And interest rates have refused to let us forget that trends persist.

The chart below highlights the five-, 10-, and 30-year US Treasury yields finding support at their respective year-to-date trendlines and pivot highs from the spring.

I thought rates might follow the...

From the Desk of Ian Culley @Ianculley  

"Trade what’s in front of you."

We say it all the time.  And it sounds simple enough.

But, with an immense amount of information circulating, it can be difficult to distinguish what’s important. 

That’s why we focus on price. Price filters the noise and useless data.

At the end of the day, it's price that pays. 

So, if bonds are breaking out to fresh multi-month highs, we should buy bonds, right?

Here’s a quick look at the bond market buy signals triggered earlier in the month: 

All three are still in play.

The five, 10-, and 30-year Treasury futures continue to churn above our risk levels. As long as that’s the case, we want to remain long toward our upside objectives...