Back in January and again last month, we discussed the “economic supercycle.”
This is an order of operations that you’ll need to intimately understand if you want to get ahead of the market.
It’s a pretty simple process. Bonds always tumble first, then it’s equities, then it’s commodities.
Given the rallies we’ve seen as a result of the CPI and PPI, this supercycle has been disrupted. We need to start watching the bonds again, as they lead the rest of the market.
They are forecasting the next market drop that will happen in the next two weeks as these reports become a distant memory in the traders’ minds.
After all, bond traders are the smartest in the room – they understand the nuances of the market and the impact of macroeconomic events better than anybody.
So where should you start to look?
Well, the Treasury Yield 10-Year Index ($TNX) is a great place to start…
The $TNX right now is heading toward a break above its 50-day moving average (50MA).
This trend suggests The Fed might ease up on rate hikes and maybe only move 50 basis points at a time.
Hell, this morning you had two well-respected, voting members of The Fed come out and say they’re not done raising rates.
The bond traders are reacting to this by driving TNX higher. That’s because it’s the “safe harbor” (another term you’ve heard me use lately) of the bond market, similar to what energy is to equities.
The bond market has several layers to it, and as I indicated, we’re going to peel a few of them back.
Just like the technical indicators, we can’t just watch one of them.
The next level for bond traders is the iShares 20-Plus-Year Treasury Bond ETF (TLT)…
And look at what it’s doing at this moment…
Abiding by the 50MA…
It’s having a nice little run higher but meeting a point of resistance against that 50MA and top Bollinger Band.
The selling pressure we are going to see will push this back in line with its trend. I’m looking at a target of $96 to $95, right where that infamous 20-day moving average (20MA) is.
Okay, there’s one more layer. We need to get down to the micro-level here.
After all, if the bond traders are the smartest in the room – we need to dig deeper and find the smartest in that group.
They’re going to be trading the bonds that move the iShares iBoxx $ High-Yield Corporate Bond ETF (HYG):
Would you look at that – it’s starting to take a dive as well. This ETF is starting to lose its relative strength when put against the S&P 500.
If you’re not sure what that means, in a nutshell, “relative strength” is when you compare one stock’s strength – or ability to increase in price – to another stock or ETF.
This is the big one, as it’s starting to lose steam and the rollover is already underway…
That means we‘ll start seeing pressure put on the S&P as the bonds lead the market.
All of that will trickle down to the rest of the market. We’ll see the values start to roll over and drop exponentially as the Fed continues to try to reconnect the wires and get the economy back on course.
To put it simply, this is what you should be taking away from all of this…
The market’s started to get a bit bubbly in reaction to last week’s CPI and PPI numbers. The Fed is now trying to tell you the market shouldn’t be moving this way.
Expect bond rates to start going up. Watch HYG – it will be the leader of the market, not the one lagging behind. It will forecast when the S&P is about to start heading back to its lows over the next two weeks.
The name of the game is getting ahead. This gives us the upper hand and makes sure we’re ready for the next move before the rest of the market.
I’ll be sure to keep you updated as I see more trends developing.
November 19 2022