Mid Year Update: Part 1: 10 Year Rates:Mid-Year Update: Part 1: Bonds/Rates:
I begin each year looking at monthly perspective charts of Equity, Rates, Commodities and DXY. Those posts can be found in their entirety, with extensive fundamental support, in the links below. I will update views on the four markets over the next few weeks.
The early 2022 the conclusions were:
- Bonds: A bull market defined by a broad declining channel, but rising inflation could easily change the trend. The most likely catalyst to end keep rates below 3.25% would be a financial accident created by higher rates.
-Equities: SPX remains in a technical bull market and there are no overtly bearish behaviors evident in the longest perspectives. However short term weakness could easily morph into a bear market.
-Commodities: Goldman Sachs Commodities index is in the center of a broad 14 year range, bounded essentially by the low set during the financial crisis and the resultant 2011 high. The most notable/useful current chart feature is the clear uptrend from the 2020 pandemic low. Until that uptrend is broken, the most immediate trend is to higher price.
-US Dollar: The wide macro range, 70.70 - 121.02 has contained price action over most of my trading career but volatility is more cyclical than price. These periods of low vol. set up conditions that often lead to explosive moves.
Reminder: Bond bull and bear markets are defined by the PRICE trend. In other words, a bull market in bonds = rising bond prices and falling yields.
10 Year:
Monthly:
- In January bonds broke above the 40 year downtrend that had defined the bull market. The break of the downtrend moves the structural long term trend from bullish to neutral.
-A monthly close above the 3.25% pivot would begin to define a long term structural bear.
- Initial targets above the pivot are found at 5.29% (the 2007 pivot high) and 6.27%, (.382 retracement of the entire bull market).
-The monthly MACD oscillator generated a long term sell signal (in December of 2020 at roughly 90 bps). Until this sell signal resolves, place less weight on buy signals generated in lower perspective (daily and weekly) time frames.
Weekly: The combination of very strong resistance, overbought MACD and bad seasonals suggest that a counter trend weekly perspective rally or consolidation is becoming likely.
-Testing very strong resistance while overbought both in terms of price and momentum. It wouldn't be surprising to see a testing probe of 3.50% but its clear that buyers (expecting lower yields) are becoming more active.
-The Mid-June spike above 3.25% left a thrust rejection that suggested strong handed sellers entering.
-Weekly MACD is threatening to roll over.
-Bond prices have very strong seasonal tendencies, weak into the May - June time frame, stronger into the middle of September, and weak into the end of the year. We are into the period where bonds transition from weakness to strength.
-While it’s clear that the trend lower in inflation has inflected higher, potential weekly perspective inflection points in commodities and energy should relieve some of the short term inflation angst and by extrapolation the pressure on bond prices.
-Major yield highs are almost always the result of a financial accident with systemic ramifications. I don't think crypto is a big enough market to qualify and other than the widening high yield spreads I don't sense much going on in this regard.
-Ten Year TIPS breakeven rates are on the verge of generating a MACD month perspective sell signal (suggesting lower expectations for future inflation). This is a direct reflection of the recent declines in energy and commodities. A TIPS sell signal would be very supportive of lower nominal 10 year rates.
Bottom Line: The long term structural bull market is dead, but the market has yet to establish a new structural bear. Unless there is a systemic catalyst, Weekly perspective rallies, particularly into the fourth quarter, should be viewed as selling opportunities.
