From the desk of Willie Delwiche.

While the Fed may be newly focused on inflation, the bond market does not appear to be similarly inclined. The yield on 30-year Treasury bonds this week has undercut its summer lows near 1.80% and the 10-year t-Note yield has dropped below the 1.40% level that has been important in the past. Moreover, the yield spread between 2’s and 10’s has dropped to its lowest level of the year. This drop in yields (reflecting strength in bonds) is not inconsistent with deteriorating equity market conditions seen beneath the surface (as well as increasingly at the index level). Coming about always carries risks, and the Fed is trying to change course in choppy waters.  

This is the video recording of the December 2nd Weekly Town Hall w/ Willie Delwiche

12/02/21 3:00 PM ET

From the desk of Willie Delwiche.

There’s no shortage of headlines this week -- a potpourri of potentially market-moving developments. 

And boy, have markets moved! Of course, these market gyrations are probably not quite for the reasons the headline writers have proposed. But we can leave that discussion for another day...

Today, I want to talk about when to change course and when to sit tight. 

Let’s consider the recent comments from Fed Chair Powell on inflation and apply a lesson I learned when sailing on the waters of Lake Michigan.

From the desk of Willie Delwiche.

Stocks finished a volatile month of November in downbeat fashion, with breadth deteriorating and downside momentum expanding. Global equities bore the brunt of the weakness, though there was plenty of it to go around. Just one month removed from a new high in the All Country World Index (ACWI), a quarter of the country-level indexes that make up that composite finished November at new 12-month lows and only 10% were above their 50-day averages. Domestically, sector-level price, breadth and momentum trends showed a degree of weakness that in the past has been associated with index-level drawdowns of 7% or more and yet the S&P 500 finished November less than 3% from it's all-time high.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

With volatility on the rise and increased evidence of fissures beneath the surface of the market, we have reduced equity exposure in our Tactical Opportunity portfolio. The deterioration at this point has not been significant enough to warrant reducing equity exposure in our Cyclical portfolio, though we have made some changes there as well to stay in harmony with the relative leadership trends we are seeing both in the US and globally. 

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

Key Takeaways:

• Bond yields rising as pressure mounts for Fed to raise rates
• From hints of new highs to expansion in new lows, the broad market is being tested.
• Commodities, currencies & bonds struggle with risk on message

With schedules of all sorts thrown off by travel and the Thanksgiving holiday (no Townhall conversation this week), this seems like  a good chance to review a handful of charts that I’ll be keeping an eye on as we move toward year-end and into 2022. 

The 10-year T-Note yield continues to move between its March high (near 1.75) and its August low (below 1.20%). Yields on 2-year and 5-year Treasuries have climbed to new recovery highs as the market has priced in Fed tightening. Given the inflation outlook, much of the debate is on why bond yields are still so low. Take a look at a chart of a global bellwether like Caterpillar (CAT) and the question might become, why are bond yields so high.

• With Energy and Financials experiencing short-term weakness, new leaders have emerged. Consumer Discretionary, Technology and Real Estate are in the top three spots in our relative strength rankings, showing leadership on both an equal-weight and cap-weight basis.  
• Our industry group heat map shows Semiconductor strength is fueling the leadership coming from the Tech sector.

From the desk of Willie Delwiche.

It’s no secret that we’ve been looking for evidence of improving breadth that would support last month’s breakouts in the small-cap and mid-cap indexes and provide fuel for a rally into the first quarter of next year. Instead we are finding evidence of the opposite - that rally participation is struggling to robustly expand. That’s the message when we look beneath the surface of the NASDAQ. The NASDAQ composite closed at a new high on the same day that the new low list rose to its highest level since March. March 2020. Another way to look at it (shown on the chart below) is that never in my career have I witnessed more NASDAQ stocks making new 52-week lows on the same day that the NASDAQ Composite made a new 52-week high. I don’t know if it will be the case this time, but when the market is heading for trouble,  new low lists crescendo in size. This is not unlike tremors before an earthquake.

This is the video recording of the November 18th Weekly Town Hall w/ Willie Delwiche

11/18/21 2:30 PM ET