From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley  

Long-term interest rates have taken a hit this week, while the short end of the curve has continued higher. When we zoom out a bit, yields have been rising across the curve since this summer.

During the past few months, the 2-year yield has ticked higher by more than 30 basis points (bps), the 5-year has increased by almost 60 bps, and the 10-year has gained 40 bps. But when we look all the way out to the 30-year, it's only risen by roughly 20 basis points.

Rates are rallying across the board, Treasuries are trending lower, and bond market investors are favoring TIPS and higher-yielding securities.

How do we want to position ourselves in this kind of environment?

Well, we definitely don’t want to be buying Treasury bonds.

In today’s post, we’re going to take a trip around the fixed-income market and discuss some US Treasury funds we can use as vehicles to express our thesis.

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

It’s no secret. 

As investors, we've been rewarded for buying stocks and commodities over bonds for more than a year now. And this will most likely remain the case, as more evidence suggests we’re in an environment that favors risk assets.

The copper/gold ratio hitting new seven-year highs, AUD/JPY testing its year-to-date highs, and cyclical stocks assuming leadership all point to an increasingly risk-on tone.

But for some of us, it’s not as simple as selling bonds and walking away. In some scenarios, we must have exposure to the bond market.

If that’s the case, we want to focus on the riskier areas of the market, just like we’re doing with other asset classes.

Let’s look at a few charts that direct our attention to the strongest areas of the bond market.

As we progress into Q3 of Fiscal Year 2021-2022, this playbook outlines our thoughts on every asset class and our plan to profit.

This playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates, as well as outline our views on the major nifty indices and the sector/thematic indices.

We also cover individual stocks we want to be buying to take advantage of the themes discussed in the playbook.

This is the video recording of the October 2021 Conference Call.

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’re beginning to see signs that risk-on behavior is re-entering the market.

Commodities are ripping in the face of a rising dollar.

Cyclical stocks are back in gear as the S&P 500 High Beta ETF $SPHB posts higher highs and higher lows relative to its low-volatility alternative $SPLV.

Meanwhile, classic risk-appetite barometer AUD/JPY sliced through a critical level of former support-turned-resistance earlier this week.

All of these point to an increasing risk-on environment. 

But what does the bond market have to say about investor positioning toward risk?

Let’s look at a couple credit spreads that speak to investors’ willingness to incur risk.

This is our ASC Research Q4 2021 Playbook.

With the current market environment giving us many mixed messages, what better time to dive in and see what's happening underneath the surface?

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One thing unique about the market is that the game is never over. There aren't four 15-min quarters or two 20-min halves like in sports.

In those endeavors there is a beginning and an end.

You know who won (or who tied in some cases). But the match is over, and there will be another one in a few days or a few months, depending on the sport.

In the market, it never ends. This can cause issues psychologically, so it's something we should all be aware of and keep in mind.

But if you ask me, currently the bulls are scoring a lot more points. This is the first time we've seen that since Q1 this year, when the bears started running up the score.

Look at the S&P500 break out to new all-time highs relative to US Treasury Bonds.

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Back in August, we presented two opposing views of the relationship between stocks and bonds.

The question was, after running into resistance at a key extension level, in which direction would the $SPY/$TLT ratio resolve?

Would stocks break higher relative to bonds, in the direction of the underlying trend?

Or would the ratio roll over in favor of bonds? It would certainly be a logical level for a trend reversal...

Fast forward two months, and we finally have our answer.

Turns out it was the former -- stocks are breaking higher relative to bonds. Here's a look:

My favorite Head & Shoulders Patterns are the ones that aren't that at all.

Markets trend. We know that for a fact. That's why Technical Analysis works. Because as Technicians, we're identifying primary trends.

And since we know that market returns do not fall under a normal distribution, and in fact, prices actually trend, it gives us a huge advantage over those who purposely choose to ignore price.

Funny how people like to ignore the only thing that actually pays anybody.

I always thought that was so strange.

Anyway, in today's example of "Not a Head & Shoulders Top", we take a look at Copper Prices. If you have any exposure whatsoever in the market, stocks, bonds or otherwise, then this is a resolution that will interest you and most certainly impact the value of your portfolio.

So is this a massive top in Dr. Copper? Or just a continuation pattern that will resolve higher, in the direction of the underlying trend?

This is the video recording of our October 4, 2021 Monthly Charts Live Strategy Session

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’re finally starting to see resolutions in the bond market.

The 30-year yield is back above 2.00%, the 10-year has reclaimed 1.40%, and the 5-year yield has cleared 1.00% for the first time since February 2020.

Now that it appears rates have picked a direction, what are the implications for the other two major asset classes, stocks and commodities?

As we highlighted last week, we want to look at cyclical and value stocks along with economically sensitive commodities, specifically energy and base metals.

And, in case you haven’t heard, higher yields should also put a bid in financials.

Earlier in the month, we pointed out the relationship between the 10yr-3mo spread and Regional Banks $KRE relative to the S&P 500 $SPY.

Today, we want to follow the same train of thought but apply the analysis to Broker-Dealers $IAI.

Here’s the chart of the 10-year 3-month treasury spread overlaid with the IAI/SPY ratio:

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.