Yes, investors continue to react, unpacking Jerome Powell’s words while looking ahead to next month’s meeting. It’s a never-ending cycle proffered by unrelenting data.
But it’s this constant flux that makes the market the most engaging puzzle in the world (aside from life, of course).
Yet one piece of the puzzle renders the chaos manageable…
The closing price.
That’s the main reason I choose to devote the majority of my energy to price charts. The closing price is seldom revised, acting as an anchor during turbulent conditions.
Call me old school, but price is never wrong.
With that in mind, let’s take a fresh look at a key intermarket ratio many (including me) have labeled “broken”...
Classic intermarket ratios – copper versus gold, regional banks $KRE versus REITs $IYR, and the Russell 2000 $IWM versus the S&P 500 $SPY – all point to lower yields.
This has been going on for months. Some may argue that these ratios are broken or no longer carry significant insight into the direction of rates.
It may be true that the strong relationship between the above ratios and interest rates has indeed decoupled.
But it’s not solely relative trends hinting at declining yields.
The stocks that benefit the most from a rising rate environment also look terrible on absolute terms…
The ProShares Equities for Rising Rates ETF $EQRR tells the story:
Growth stocks seem concerned with only one thing – printing fresh highs.
The Tech sector ETF $XLK posted new 52-week highs yesterday. And the Communications ETF $XLC rallied within reach after taking out its Aug. ‘22 pivot highs.
So where does that leave bonds and other long-duration assets?
If these base breakouts across growth sectors hold, I imagine bonds have some serious catching up to do…
Why?
Growth stocks tend to trend with bonds since they’re both long-duration assets. Changes in interest rates directly impact US Treasuries and affect tech stocks more than other equities.
Check out the tight relationship between the Long-Term Treasury ETF $TLT and the Technology sector $XLK:
Bonds are catching a bid as a risk-off tone plays across the market.
Aside from intraday knee-jerks in price, not much has changed. Rates and the US dollar remain range-bound. US Treasuries have yet to provide a definitive buy signal.
And the S&P 500 continues to contend with overhead supply at the 4,200 level.
It’s a chop fest.
But one data point has changed in recent sessions – the probability of a rate cut or a rate hike next month based on the fed funds futures…
Check out last Thursday’s probabilities after the FOMC raised the overnight rate by 25 basis points:
The futures market was pricing an 8.9% chance of a rate cut in June with a 91.1% chance of a pause in the hiking cycle.
And not much has changed. Rates churn sideways as bonds carve out tradeable lows.
The market is simply playing a new verse of the same old song.
But the tempo picks up as another antagonist enters the scene – regional banks!
Banks are the market’s weakest link, especially the smaller regional banks. They simply can’t stop falling.
To be clear: This isn’t about possible contagion risks or the next leg lower in the S&P 500. I’m more interested in the implications for interest rates.
The banking sector has captured every investor’s full attention. And regional banks have hinted at underlying problems with the rising rate environment for more than a year.
Check out the dual-pane chart of the Regional Bank ETF $KRE versus the REITs ETF $IYR ratio and the US 10-year yield $TNX:
What caught my attention following the SVB collapse wasn’t the headlines so much as how the markets handled the news and the stress that followed.
It’s difficult to find the silver lining of one of the largest bank failures since the financial crisis. But I’m more of a glass-half-full kind of guy.
Despite the relentless barrage of negative headlines, it’s undeniable that risks have been contained, and the markets have weathered the storm – at least for now.
Investors ditched equities and ran to the safety of US Treasury bonds as the saga unfolded. It was like the good old days when stocks were risk assets, and bonds acted like – well, bonds!
Now that the dust has settled, I believe the renewed classic intermarket relationship between stocks and bonds and the familiar patterns of risk-on/risk-off behavior bodes well for the overall market.
Especially when you consider easing volatility…
Here’s an overlay chart of the Bond Volatility Index $MOVE and the S&P 500 Volatility Index $VIX:
Monday night we held our March Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each
Despite another CPI report and the latest job numbers reflecting easing inflationary pressure, markets are a mess!
Indecision and uncertainty are running high. Investors simply aren't able to get a read on the economy and the Fed's next step.
I don’t blame them.
If you’re focusing on the Fed comments du jour or lagging economic data that will likely be revised in the future, confusion and pain are the higher probability outcomes.
The 30-, 10-, and 5-year contracts are trading above our risk levels. And the bond ETFs we covered a couple of weeks ago are also flashing buy signals.
The bond market is sending a well-advertised message to all investors…
It’s time to buy bonds.
Let's review one of the most liquid treasury ETFs, $TLT.
Zooming out on the weekly chart of the Treasury bond ETF TLT…
We have a potential failed breakdown below the former 2014 lows, followed by a tight, multi-month consolidation.
