From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
It’s a tale of two markets.
The weight of the evidence remains mixed across asset classes. We also continue to see more and more risk assets struggle at overhead supply. This is particularly true for equity and commodity markets.
From an intermarket perspective, most risk appetite ratios and risk-on relative trends are either moving lower or are rangebound.
Simply put, there’s little in terms of directional edge for investors. The data remains split right down the middle — and there are sound arguments for both the bull and bear case.
Although the information we’re getting from the Bond Market is much more consistent these days. And what we’re seeing is suggesting lower yields for longer.
Let’s take a look…
For us, it really comes down to this one chart at the end of the day: the US 10-Year Yield:
We are beginning to see this crucial benchmark rate break lower in a meaningful way.
1.40% has been our line in the sand for months now, and sellers violated it with authority last week.
As long as we’re trapped beneath this key level, the bias is lower for rates. Developed markets outside the US also seem to agree with what we’re witnessing domestically. Have a look:
The series of lower highs and lower lows across the board stands out on this chart. The short-term trend is now lower for interest rates around the globe.
Our intermarket signals have pretty much all been in agreement with this, as they’ve suggested a move lower in rates for months now.
The Copper/Gold ratio is a good example of this theme:
This was actually one of the last to break down and violate our risk level at the 2018 highs around 0.0025 (see risk checklist below).
As for the intermarket signals from equity markets, Financials vs. the S&P failed at key resistance back in May, well before the US 10-Year rolled over:
Now that rates are trapped beneath 1.40, further underperformance from Financials seems all the more likely.
As we like to say, it’s tough to have a bull market without participation from the big banks and financial stocks…
Speaking of which, both the banks and broker-dealers recently failed at key levels relative to the S&P 500 and are now trending steadily lower along with yields:
Another one of our favorite interest rate barometers has also been pointing to lower yields for some time. This is regional banks relative to real estate, which peaked all the way back in March and is currently trading at lows not seen since last year:
They’re likely coming under increasing pressure. And we’re already seeing this play out in both US and European banks:
Even EUFN has seen a major failed breakout. This kind of development does NOT bode well for global equities and risk assets.
And don’t snooze on the importance of the little guys. Community Banks are also failing at key resistance and breaking lower in lockstep with the 10-year. They tend to lead the bigger banks from a trend perspective. The reasoning for this is simple: tighter yield spreads put pressure on lending which hurts smaller banks far more than big banks because they derive more of their revenue from their loan book.
This is a solid warning signal for the overall risk backdrop moving forward.
Now comes the big question… What does a world with the US 10-year below 1.40% look like? And how much lower can it move?
A move back toward 1.00 would not be a shock to us, due to the large air pocket at current levels which could result in a fast move to the downside.
We are identifying key levels in the most influential markets and relative ratios, and seeing if these charts are above or below these critical overhead supply zones.
Currently, only 36% of our list is in risk-on territory. Also, notice how so many of these charts are sitting right at their key levels. A few big up or down days could quickly swing this pendulum fast.
And it’s unlikely that the risk assets and ratios on our list continue trending higher in an environment where yields are collapsing.
Some of the recent damage needs repairing before markets can resume higher in the direction of their underlying uptrends. But it’s likely going to require some patience on the side of the bulls at this point.
We never know exactly what is going to happen, but as long as yields are trapped beneath 1.40%, markets are likely to remain messier for longer. And our checklist is likely to flip further in the direction of the bears.
Could they make a save here, reclaim this key level, and repair the current damage? Absolutely. But, when we weigh the evidence, it’s suggesting these new lows are likely to stick. And as long as that’s the case, it’s probably only a matter of time until the banks and other risk assets follow…
As always, we’ll be keeping a close eye on these key levels moving forward to gauge the market’s overall health, and we will be right here talking about it as soon as anything changes.
Let us know what you think and feel free to reach out with any questions!