From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
It finally happened…
The yield curve inverted for a brief moment as the 2-year yield rose above the 10-year earlier this week.
But whether or not it inverted yet is beside the point. It’s been flattening for a long time, and that’s the direction we’re headed in. It's only a matter of time.
While media outlets and fearmongers will spin this development as an urgent warning of an impending bear market, here's what you need to know: Throughout history, equities have done well during and after inversions.
This commonly observed leading indicator has a tendency to precede major market tops by years, not months. In other words, there's still time. The average lead time is about 18 months after prior inversions.
More importantly, when it comes to forecasting bear markets and recessions, many experts will argue that it is actually not the 2-year we should be focused on, but the 3-month yield.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Rates continue to move higher around the world as central banks do their best to combat inflation.
As investors, our best course of action is to position ourselves in those areas that benefit most from rising rates.
Commodities and cyclical stocks immediately come to mind. But there are also specific currencies that tend to excel in rising rate environments.
Today, we'll discuss a handful of emerging-market currencies with heavy commodity exposure.
We’ve been waiting on these currencies to catch higher and confirm the price action in commodities since last year… and it looks like it’s finally happening.
Let’s dive in.
First up is an overlay chart of the US 10-year yield and our equal-weight basket of EM commodity currencies:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Cyclical stocks are all the craze.
If you're doing well this year, it's because you own these stocks. If you're not, it's because you don't own these stocks.
Whether we're talking about energy, agricultural inputs, or industrial metals, these are the kinds of industry groups that are showing relative strength.
And, to be clear, this is nothing new. This theme has been in place for over a year now.
The only new development is that we're seeing upside momentum in these names pick up. As a result, the gap between these winners and the rest of the market has widened to historic levels.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
It's beginning to feel more and more like a risk-on environment out there.
Commodities are ripping higher. Stocks are digging in at critical levels. And defensive assets such as Treasury bonds and the Japanese yen are in freefall.
Despite the market volatility this year, investors continue to be rewarded for buying stocks over bonds. This has been the case for two years now, and there's no evidence it will change anytime soon.
When we look to our risk indicators and risk appetite ratios, the majority are still stuck in a range. With the stocks versus bonds ratio resolving to fresh highs, we're thinking the rest may soon follow.
But first and foremost, the price action from this classic intermarket relationship suggests that stocks are still the place to be.
Let’s take a look.
Here’s a chart of the S&P 500 $SPY versus US T-Bond ETF $TLT:
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The unwind is on in the aussie!
After accumulating a historic net-long position last fall, commercial hedgers are scrambling to cover. Over the past four weeks, the smart money has trimmed its long exposure to roughly half of what it was.
This is reflected in our most recent Commitment of Traders Heatmap, which you can view here.
When positioning flips at extremes – like we’re seeing now in the Australian dollar – we want to look for opportunities to ride the emerging trend. In other words, we want to bet in the direction that commercial hedgers are currently unwinding away from.
In the case of AUD, they recently had a historic net long position. As such, we’re looking for bullish technical characteristics to see if a long setup makes sense here.
It just so happens that things are really coming together for the aussie chart lately. We love when technicals and sentiment line up like this.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Gold looks like it’s ready to run.
The largest gold miner in the world, Newmont Mining Corp. $NEM, has broken out of a multi-year base.
Silver and platinum have dug in at critical support levels and are catching higher.
And, most importantly, gold is in the process of reclaiming its former all-time highs from summer 2020.
These are all bullish developments, suggesting gold -- and precious metals more broadly -- are ready to join in on the party that most commodities have been enjoying for more than a year.
Last month, gold broke above its former 2011 highs near 1,924. Here’s a zoomed-out view of the chart:
High Beta vs. Low Volatility, Copper vs. Gold, and our custom Risk-On vs. Risk-Off ratio have all gone nowhere since the beginning of 2021.
The Australian dollar/Japanese yen also falls into the range-bound category, as the risk-on pair looks a lot like the ratios we just mentioned.
But AUD/JPY has been showing resilience the past few weeks and is currently challenging the upper bounds of its multi-month range.
Since most risk appetite indicators aren’t giving us much in the form of new information these days, an upside resolution from AUD/JPY would be a major development.
It hasn’t happened yet, but things are certainly setting up that way.
In today’s post, we’ll dive into one of our favorite risk-on/risk-off gauges – the AUD/JPY cross - and discuss what it’s currently suggesting about risk-seeking behavior.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities have been on a tear, with the Bloomberg Commodity Index recently posting its best week since 1970 and the CRB Index rallying more than 25% year to date.
Despite the broad strength from commodities, Dr. Copper – a key economic barometer – has yet to break out like so many of its peers.
After making a new all-time high last Friday, buyers were unable to sustain the move, and price retreated into its former range.
While it’s great to see so many other contracts trending higher, bulls really need to see copper join the mix. If this is truly a new commodity supercycle, it better break out from this consolidation.
It is that important to the overall asset class.
Let’s break down the various technical scenarios for copper’s recent move and discuss what they mean for the entire space.
First, the move could have been a premature breakout:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Benchmark rates around the world have been rolling over as uncertainty sweeps across markets.
Despite the growing pessimism among investors, global yields are digging in at critical levels and bouncing higher in recent sessions.
We discussed how international yields – particularly those in developed Europe – confirmed the new highs in US rates earlier in the year.
Today, we’re going to check in on some of those same yields and see if this is still a piece of confirming evidence for rates here in the US.
With the US 10-year hovering around its breakout level at last year’s highs we’re looking for any clues we can get for whether or not these new highs are here to stay.
If the new highs in global yields are holding, that would go a long way in supporting the upside resolution in the US 10-Year.
On the other hand, if we start to see more and more yields around the world fail and roll over, the US will likely follow.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
US dollar strength is broadening as global currencies lose critical levels against it.
Last week, we outlined crucial support levels in the EUR/USD pair. Those levels have since given way, as sellers have taken control of this major forex cross.
Today, we’re going to highlight two other USD pairs that recently sliced through key levels, further paving a path of least resistance that favors the US dollar.
First up is the British pound, GBP/USD:
The pound has been carving out a distribution pattern for the past year.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities are having their best week since 1970. And if you don't know what happened after that, let's just say it was a good decade for them as a group.
The CRB Index is up more than 13%. Crude oil is trading above 100. Wheat futures opened limit up last night, “dotting the chart.” Base metals such as aluminum and tin continue to print all-time highs.
And even precious metals have joined the party!
Could it get any more bullish?
As it turns out, it can…
After almost a year of sideways action, Dr. Copper looks ready for a fresh leg higher, as it just closed the week at new all-time highs!
Here's a close-up look at the continuation pattern copper has been consolidating in since May of last year:
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
We could sit back and speculate on what measures the Federal Reserve is likely to take to curb inflation. But it wouldn't change the fact that inflation is already here.
We’d rather focus on what market participants are doing now to position their portfolios for these inflationary pressures.
Since last year, inflation has gripped markets, and we don’t foresee it going away anytime soon. We think the best course of action is to get used to this environment and focus on assets that tend to perform well during periods of inflation.
One of our favorite ways to measure inflation expectations is by analyzing Treasury Inflation-Protected Securities (TIPS) versus Treasuries.
Relative strength from TIPS implies that investors are positioning themselves for a general increase in the prices of goods and services. That’s exactly what we’re seeing today.
Let’s take a look and discuss what we want to do about it.
Here’s an overlay chart of the $TIP/$IEF ratio and the US five-year breakeven inflation rate:
