The way I learned it was that the Bond Market is smarter than the Stock Market. I've heard theories that it's because the Bond Traders are smarter than stock jockeys. Maybe it's because the Bond market is a lot bigger than the Stock Market. Maybe it's all a bunch of nonsense. Who knows? The way I like to approach it is simply to use them both to my advantage equally. They both play a role in the process. When we see evidence of risk appetite in the stock market, we want to see the bond market confirming that and vice versa. It's when one is suggesting one thing and the other is signaling something else that we start to question what is really going on here.
Today we're going to focus on 3 specific spreads that we want to be watching closely here as the Summer comes to an end.
Every market environment is different. It's changing every day. What might give us insight into what's happening during one period of time in the market doesn't guarantee that it will help in the future, or ever again for that matter. Back in 2008-2009, correlations spiked all over the world and the US Dollar was moving in the exact opposite direction as the S&P500. Watching the Euro and more specifically the Euro/Yen was a huge advantage back them. I remember it like it was yesterday. But in today's environment, those negative correlations are no longer valid. It's a different market environment now. It's always different.
So while the EUR/JPY and the US Dollar Index were great tells for the direction of US Stocks in 2008, today we're looking at different indicators. Two that I'm particularly focused on right now are Germany and London. First of all, these are 2 of the most important indexes in the world. Top 3? Top 5? Either way, both of them are on the Mount Rushmore of Stock Market Indexes.
Every month I host a conference call for All Star Charts Premium Members where we discuss ongoing themes throughout the global marketplace as well as changes in trends where new positions would be most appropriate. This includes U.S. Stocks & Sectors, International Stock Indexes, Commodities, Currencies and Interest Rate Markets.
We've been bullish towards US and Global Stocks once again since May. I still think this is an environment where we need to be buying weakness in stocks, not selling strength. The weight of the evidence is still pointing to an increased amount of risk appetite, not risk aversion. I ran through all 1000 charts of the S&P500 stocks on both weekly and daily timeframes and there are more good ones than bad ones. A lot more good ones, in fact. It's hard for me to fight that.
It's the middle of the summer and everything is quiet. Even the slightest bit of volatility brings in the panic. It's pretty amazing to watch. There are two schools of thought here. First, the historic short positions in S&P500 Volatility Index Futures have their monthly unwind, and stocks get adjusted accordingly. It's a volatility trade unwinding causing these 1 or 2 day spikes. But then the shorts come back in, make money for a period of time and then get swept out again, like this week. The cycle repeats. Now we move on again and volatility shorts crush it for the rest of the summer. That's thesis 1.
The other scenario is that there is a lot more squeeze behind this one and stocks can have a much bigger and longer adjustment. Take a look at the C.O.T. Reports. The numbers are outrageous. These Volatility shorts are natural buyers of volatility. It's scary when you think about it. But regardless, they stay short. It is what it is. Stocks continue to shake them off. But is this time different?
One of the most classic characteristics of markets that are not trending higher is when momentum is getting oversold. Markets in uptrends don't get oversold. They get overbought! Think about it: How can an overwhelming amount of buyers possibly be a bad thing?
I understand there are some strategies that wait for oversold conditions in their indicators to trigger buying opportunities and other things like that. That's cool. But when I am referring to momentum, I am specifically describing a 14-period RSI. For today's discussion we'll focus more on 14-day RSI for this specific timeframe. If we were having a longer-term conversation, we would be looking at a 14-week RSI on a chart that goes back decades. Currently, the weekly chart is in a bullish range, so that is not in question. Today we're focused on the coming months and quarters.
Maybe this is the top for the S&P500. And maybe the Dolphins win the Super Bowl this year. And Maybe I'll have steak for dinner on Friday.
The best part about this business is that none of us know what's going to happen tomorrow. It doesn't matter what you've accomplished until now. We're all trying to win the same war moving forward. It's pretty cool when you think about it.
The smartest people I know consume the most content by reading books and listening to podcasts. That's just what it is. The common denominator among some of the least successful people I know is that they don't read books or listen to podcasts. They choose to spend that time watching the news. They read newspapers, magazines and things written by journalists, instead of actual professionals. I want to know what market participants are doing. I don't want some 26 year old with no investing experience deciding what is or isn't important to me. Let me hear it straight from the horse's mouth. That's why I like reading books and listening to podcasts produced by the actual market professionals themselves!
As much as I enjoy listening to the great podcasts that are already out there, like Barry's Masters in Business and Patrick's Investors Field Guide, us Technicians don't have one of our own. I think it's about time we change that....
It's important to not only have a broader perspective on the market, but to look underneath the surface to see what is actually taking place. Precious Metals haven't exactly been my favorite asset class lately. It's for good reason too. There have been so many better places to be. It's not even close.
So today we ask the question: Is it time to be buying precious metals?
My Gold workbook has 100 charts in it. You can find the entire thing regularly updated here.
This week I invited everyone to a free webinar where I walked through my process to find only the most favorable risk vs reward opportunities. The point of this exercise was not just to make a list of hot stocks. Our purpose here is to do the homework, create the framework for the current market environment, and then decide how to best take advantage of the most important themes. This process and idea generation is a weekly thing for me and includes stocks, commodities, currencies and interest rate markets all over the world.
We had a great showing at the live webinar with representatives from all over the world. It's amazing how much interest there is globally for technical analysis. It's a beautiful thing to see.
You guys know how much I like my intermarket analysis. It's a tool that we have as market participants that simply cannot be ignored. If you're putting together a portfolio for a client, managing your own account or just looking for major trends, comparing asset classes to one another really shows where money is flowing and where it is flowing from. It would be irresponsible of us to ignore these intermarket relationships if we're trying to make money in the market and manage risk responsibly along the way.
Today, we're taking a look at one of the most important developments across the globe. We're comparing the U.S. Stock Market and the U.S. Treasury Bond Market to one another. To keep things nice and simple we'll use the most liquid exchange traded funds that represent each market: $SPY and $TLT. As you can see here, in November last year, Stocks broke out of a 9+ year base to new all-time highs. The important thing we want to reiterate here is that the breakout has held relentlessly, consolidated for half a year, and now the path of least resistance appears to be higher:
We're in the middle of Summer and markets are quiet, almost too quiet. It's easy to overthink things this time of the year and get lost in noise that is mostly made up to fill space. There isn't much going on right now for market participants, so it can only be worse for people whose job it is to report on it. Headlines that would normally fall to the bottom of the stack rise towards the top, just out of sheer necessity. The problem is they don't differentiate between what is important and what is just relatively important today because there's nothing else going on. That irresponsible behavior suggests to me that it is best to tune it all out completely. It's not worth it.
