From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
I was talking to the team earlier this week and mentioned that I was having a hard time writing. Grant and Ian were quick to remind me that it's probably because "nothing new is happening!"
They were right. Until now...
We finally got a major resolution in what we consider one of the most important charts in the world these days.
I'm talking about the US 10-year yield reclaiming that critical 1.40% level this week. And this begs the question as to what a rising rate environment might mean for investor portfolios.
Well, one thing we know for sure is we want to stay away from bonds... unless we're shorting them.
But how do we want to position ourselves in the stock market if yields are breaking out?
It's simple really. Some stocks do better with rising/higher rates, while others thrive in markets characterized by low growth and low yields. If this is the beginning of a fresh move higher for yields, then we want to be focused on buying the stocks that are likely to benefit the most.
The ASC team did their monthly conference call this week, where they rip though a million charts and highlight the things we need to pay attention to -- the trends, the divergences, and particular setups in stocks that we like.
The blizzard of information they throw at us can be overwhelming at times. This is why you come to me to cull through it all and find my favorite setups that can be played with options.
Today's pick comes out of that call and its focused on the small business side of things.
The story this week was bond yields and the mounting evidence that they are ready to move higher. 10-year yields in the US and Germany have climbed to their highest levels since July. The US 10-year T-Note yield has broken above 1.40% and could soon have 1.75% again in its sights. A 2-handle by the end of the year would not be surprising. Except for the May/June time period, German yields are the least negative they have been since crossing the zero threshold in mid-2019. These moves may reflect inflation expectations, but with the rise in the 2-year T-Note yield this week (highest level since March 2020) it is also the bond market taking seriously the possibility that the Fed will soon be joining the 30% of global central banks that have already begun to raise interest rates. For investors, this could be an opportunity to rotate back into cyclical sectors that do well in rising rate environments.
Congratulations to those holding positions in Zee Entertainment, for you, have been rewarded! Well, at least for now.
Zee has been notoriously stubborn for remaining sideways for all of seventeen months now. That's a long time, considering several stocks have grown two-fold, three-fold at the least.
But Zee has also been a part of a sector that has consistently underperformed the market.
But have things changed with the move we saw in Zee over the past two weeks?
From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Considering the selling pressure in recent weeks, we were very excited to take a look at our breadth indicators today to see if we finally saw some downside expansion worth pointing out. Spoiler alert: There was nothing there.
Being as we're in a sideways market, we're always on the lookout for a change in character in internals that might suggest some resolutions are finally on the horizon. And since bears have been driving stocks lower since early this month, our focus is on new short-term lows.
With the S&P experiencing some volatility and revisiting its 50-day moving average this week, did we finally get that "fall day?"
I'll admit it. I'm a Fed-watcher from way back. I enjoy it as much as anyone, and probably more than most (especially those within the All Star Charts community).
While I never had to analyze the weekly money supply numbers to figure out what the Fed was doing, I've remained attentive as the Fed has revamped its mode of communication with the market time and again.
The latest iteration -- a written statement and press conference after every FOMC meeting coupled with summary economic projections released four times a year -- reflects the Fed's desire for transparency. It also supports the belief that forward guidance is a powerful tool at a time when interest rates are stuck near zero.
Market participants listen, absorb the message and the forecasts, and react. We did this dance again this week.
Here’s the latest batch of forecasts from the Fed:
Are the bears trapped, and now we rally on higher?
As we've said for those with shorter-term time horizons, there's nothing wrong with taking a swing if Bitcoin's above these lows.
The bears in the derivs are growing too, with funding rates across all exchanges falling back into the negative territory despite Bitcoin's recovery into the day.
Key Takeaway: Optimism has begun to cool as sentiment relieves the excesses of early summer. Yet, we are a far cry from a complete unwind that cyclical damage suggests is necessary. As investors become more risk-averse, we are looking for evidence that pessimism has become widespread and excessive (more II bears than bulls, NAAIM Exposure Index reading below 30, ETF outflows close to or below zero on a 4-week basis, and a daily close in the VIX greater than 30). Though there is certainly an increased level of caution and concern among market participants, we haven’t seen a degree of fear or pessimism in any of our indicators that point to the warranted rebalance. For now, risks remain elevated as sentiment swings toward pessimism.
