T-Bond FuturesEducation
Ugly Markets - Embrace the Trends
The trend is always our best friend in markets across all asset classes. While many investors and traders waste their time interpreting the new cycle and other factors, the path of least resistance of market prices is a real-time indicator of the current sentiment.
Market prices rise when buyers are more aggressive than sellers and fall when sellers dominate buyers. The current price of any asset is always the correct price because it is the level where buyers and sellers agree on value in a transparent environment, the marketplace.
The results for Q2 were ugly in most markets. Stocks and bonds fell, the dollar index rose, and four of six commodity sectors posted losses. The best performing sectors reflect the supply-side issues created by the war in Ukraine, sanctions on Russia, and Russian retaliation.
Uncertainty in markets creates price variance, and markets reflect the economic and geopolitical landscapes. As we move into the second half of 2022, uncertainty is at the highest level in years. Meanwhile, market liquidity tends to decline during the summer vacation months. Lower participation only exacerbates price variance as bids can disappear during selloffs and offers often evaporate during rallies. It is a time for caution in markets across all asset classes, but the trends on a simple price chart tell us all we need to know about the path of least resistance of prices.
Stocks and bonds fall in Q2
The stock market was ugly in Q2:
Over the first half of 2022:
As the Fed began increasing the Fed Funds Rate and reducing its swollen balance sheet, the US 30-Year Treasury bond futures fell 8.19% in Q2 and were 13.75% lower over the first half of this year as of June 30. The long bond fell below its technical support level at the October 2018 136-16 low and reached 132-09 in June before bouncing.
Four of six commodity sectors post losses
While the energy and animal protein sectors posted gains in Q2, base and precious metals, grains, and soft commodities moved to the downside. The quarterly results by sector were:
Over the first half of 2022, four of six sectors were higher than at the end of 2021:
The results reflect the economic and political landscapes. Energy and food prices rose as the war in Ukraine threatens the global supply chains. Metal prices declined because central bank policies and economic conditions led to rising rates and a strong US dollar.
Rising interest rates and a strong dollar
The US Federal Reserve blamed rising prices and inflation on “transitory” pandemic-related factors throughout most of 2021. The central bank waited far too long to address inflation and is now playing catch-up when the war in Ukraine and geopolitical tensions impact the global economy’s supply side. Central bank monetary policy can affect the demand-side, but they have few tools to manage supply-side shocks. The rise in energy and food and the decline in metal prices tell us that central banks are struggling to address the current economic landscape.
The US 30-Year Treasury bond futures chart shows the pattern of lower highs and lower lows. While the long bond bounced from the June low, the bearish trend remains intact in early July.
The US dollar index, which measures the US currency against other world reserve foreign exchange instruments, rose 6.21% in Q2 and was 9.28% higher over the first half of 2022. The dollar index settled at the 104.464 level on June 30 and rose to a new two-decade high of 107.615 on July 8. Since the US dollar is the world’s reserve currency and the pricing benchmark for most commodities, a strong dollar caused raw materials to rise in other currencies, putting downward pressure on dollar-based prices.
Economic contraction- Copper tells a story
The US remains the world’s leading economy. In Q1, US GDP fell, and it likely declined in Q2. The textbook definition of a recession is two consecutive quarterly GDP declines.
Copper is a base metal that trades on the London Metals Exchange and the CME’s COMEX division. Copper has a long history of diagnosing the economic climate, earning it the nickname Doctor Copper. In Q1, COMEX and LME copper prices rose by around 6.5%. In Q2, they plunged, with the COMEX futures falling 21.82% and the LME forwards dropping 20.41%. COMEX and LME copper prices were down over 15% over the first half of 2022.
The chart of COMEX copper futures shows the move to an all-time $5.01 per pound high in March 2022 and a decline to a low below $3.40 in early July. The descent below technical support at the August 2021 $3.98 low and nearly 30% drop as of July 8 are signs that recession is not on the horizon; it has already gripped the economy.
Go with the flow
Inflation remains at a four-decade high, and while raw material prices have declined, the economic condition is far higher than the current Fed Funds rate. The central bank has pledged to fight inflation with monetary policy tools. Higher interest rates could put more downward pressure on raw material prices and the stock market as the economy contracts. Time will tell if the Fed continues its hawkish path or reacts to current market conditions. Waiting far too long to address inflation in 2021 suggests the central bank will likely remain hawkish regardless of market conditions in 2022.
It is impossible to pick tops or bottoms in any market as prices often rise or fall far beyond where logic, reason, and rational analysis dictate. A market participant’s most effective tool is to follow the trends until they bend. The path of least resistance of asset prices can be the most significant factor for future performance. In these troubled times, where uncertainty is at the highest level in years, don’t fight the trends and go with the flow. In early Q2, it remains bearish in many markets across all asset classes. Stocks, bonds, commodities, cryptos, and other asset classes are making lower highs and lower lows, while the dollar index is moving in the opposite direction.
Markets are ugly, but nothing lasts forever. Trend following can be the best route for capturing the most significant moves. You will never buy the lows or sell the highs when following trends, as they will cause short positions at bottoms and long positions at market tops. However, trend-following allows for extracting a substantial percentage from a significant price move. Embrace those trends until they change.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- Stocks and bonds fall in Q2
- Four of six commodity sectors post losses
- Rising interest rates and a strong dollar
- Economic contraction- Copper tells a story
- Go with the flow
Market prices rise when buyers are more aggressive than sellers and fall when sellers dominate buyers. The current price of any asset is always the correct price because it is the level where buyers and sellers agree on value in a transparent environment, the marketplace.
The results for Q2 were ugly in most markets. Stocks and bonds fell, the dollar index rose, and four of six commodity sectors posted losses. The best performing sectors reflect the supply-side issues created by the war in Ukraine, sanctions on Russia, and Russian retaliation.
Uncertainty in markets creates price variance, and markets reflect the economic and geopolitical landscapes. As we move into the second half of 2022, uncertainty is at the highest level in years. Meanwhile, market liquidity tends to decline during the summer vacation months. Lower participation only exacerbates price variance as bids can disappear during selloffs and offers often evaporate during rallies. It is a time for caution in markets across all asset classes, but the trends on a simple price chart tell us all we need to know about the path of least resistance of prices.
Stocks and bonds fall in Q2
The stock market was ugly in Q2:
- The DJIA fell 11.25%
- The S&P 500 declined 16.45%
- The tech-heavy NASDAQ dropped 22.45%
Over the first half of 2022:
- The DJIA was down 15.31%
- The S&P 500 fell 20.58%
- The NASDAQ plunged 29.51%
As the Fed began increasing the Fed Funds Rate and reducing its swollen balance sheet, the US 30-Year Treasury bond futures fell 8.19% in Q2 and were 13.75% lower over the first half of this year as of June 30. The long bond fell below its technical support level at the October 2018 136-16 low and reached 132-09 in June before bouncing.
Four of six commodity sectors post losses
While the energy and animal protein sectors posted gains in Q2, base and precious metals, grains, and soft commodities moved to the downside. The quarterly results by sector were:
- Energy- +6.77%
- Animal proteins- +3.31%
- Gains- -3.46%
- Soft commodities- -4.12%
- Precious metals- -12.91%
- Base metals- -27.24%
Over the first half of 2022, four of six sectors were higher than at the end of 2021:
- Energy- +43.86%
- Grains- +14.65%
- Animal proteins- +10.96%
- Soft commodities- +1.46%
- Precious metals - -5.43%
- Base metals- -13.07%
The results reflect the economic and political landscapes. Energy and food prices rose as the war in Ukraine threatens the global supply chains. Metal prices declined because central bank policies and economic conditions led to rising rates and a strong US dollar.
Rising interest rates and a strong dollar
The US Federal Reserve blamed rising prices and inflation on “transitory” pandemic-related factors throughout most of 2021. The central bank waited far too long to address inflation and is now playing catch-up when the war in Ukraine and geopolitical tensions impact the global economy’s supply side. Central bank monetary policy can affect the demand-side, but they have few tools to manage supply-side shocks. The rise in energy and food and the decline in metal prices tell us that central banks are struggling to address the current economic landscape.
The US 30-Year Treasury bond futures chart shows the pattern of lower highs and lower lows. While the long bond bounced from the June low, the bearish trend remains intact in early July.
The US dollar index, which measures the US currency against other world reserve foreign exchange instruments, rose 6.21% in Q2 and was 9.28% higher over the first half of 2022. The dollar index settled at the 104.464 level on June 30 and rose to a new two-decade high of 107.615 on July 8. Since the US dollar is the world’s reserve currency and the pricing benchmark for most commodities, a strong dollar caused raw materials to rise in other currencies, putting downward pressure on dollar-based prices.
Economic contraction- Copper tells a story
The US remains the world’s leading economy. In Q1, US GDP fell, and it likely declined in Q2. The textbook definition of a recession is two consecutive quarterly GDP declines.
Copper is a base metal that trades on the London Metals Exchange and the CME’s COMEX division. Copper has a long history of diagnosing the economic climate, earning it the nickname Doctor Copper. In Q1, COMEX and LME copper prices rose by around 6.5%. In Q2, they plunged, with the COMEX futures falling 21.82% and the LME forwards dropping 20.41%. COMEX and LME copper prices were down over 15% over the first half of 2022.
The chart of COMEX copper futures shows the move to an all-time $5.01 per pound high in March 2022 and a decline to a low below $3.40 in early July. The descent below technical support at the August 2021 $3.98 low and nearly 30% drop as of July 8 are signs that recession is not on the horizon; it has already gripped the economy.
Go with the flow
Inflation remains at a four-decade high, and while raw material prices have declined, the economic condition is far higher than the current Fed Funds rate. The central bank has pledged to fight inflation with monetary policy tools. Higher interest rates could put more downward pressure on raw material prices and the stock market as the economy contracts. Time will tell if the Fed continues its hawkish path or reacts to current market conditions. Waiting far too long to address inflation in 2021 suggests the central bank will likely remain hawkish regardless of market conditions in 2022.
It is impossible to pick tops or bottoms in any market as prices often rise or fall far beyond where logic, reason, and rational analysis dictate. A market participant’s most effective tool is to follow the trends until they bend. The path of least resistance of asset prices can be the most significant factor for future performance. In these troubled times, where uncertainty is at the highest level in years, don’t fight the trends and go with the flow. In early Q2, it remains bearish in many markets across all asset classes. Stocks, bonds, commodities, cryptos, and other asset classes are making lower highs and lower lows, while the dollar index is moving in the opposite direction.
Markets are ugly, but nothing lasts forever. Trend following can be the best route for capturing the most significant moves. You will never buy the lows or sell the highs when following trends, as they will cause short positions at bottoms and long positions at market tops. However, trend-following allows for extracting a substantial percentage from a significant price move. Embrace those trends until they change.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
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