pebblewriter

Tag: treasuries

  • Update on USDJPY: Sep 29, 2023

    We’ve been accurately forecasting USDJPY for over 12 years, starting with recognition of a falling wedge that yielded a huge breakout in 2011 [see: USDJPY – How Low Can it Go?] and evolving to an understanding of the importance of the Yen Carry Trade.

    The Japanese economy is a hot mess, but the chart patterns have been fairly easy to discern. When there’s any doubt, remember two principles:

    (1) The BoJ will do whatever it takes to keep stocks on the rise.
    (2) Ignore any other principles.

    So, when a channel breakout occurred in March 2021 [see: USDJPY’s Turn] in the wake of the 35% Covid crash, we were right on top of it. Likewise, we could see the ginormous Inverted Head & Shoulder Pattern coming from a mile away.   USDJPY zipped up through the “resistance” and has tagged every target we’ve set for it. It has further to go, though the path should continue to confound everyone but chartists.continued for members… (more…)

  • Debt Ceiling Worries

    We’re starting to see cracks in the equities and bond markets related to the debt ceiling. Interest rates are ratcheting higher. And, although OPEX-related maneuvers are working to prop up stocks, we had a momentary breakdown in SPX yesterday.

    Utilities, a bond proxy for some, have taken a big hit this week as investors shift into shorter-term, less volatile treasuries.

    Which would you rather own, XLU with a beta of .56 and yield of 3.01% or a 6-mo Tsy paying 5.25%?

    continued for members… (more…)

  • The Bond Market Finally Woke Up

    For months we’ve been warning about the coming inflation problem, wondering when the bond market would notice and/or care.  The immediate problem in a nutshell:

    One of the most highly correlated components of CPI with the headline rate is the price of energy, and gasoline in particular.  If prices were to remain where they are now, the base effect will result in a 40% increase YoY in April.  Historically, this has produced headline CPI in excess of 2.5%.The Fed points out this base effect bump will be transitory and should be ignored, but the recent rise in interest rates tells us that the bond market is not ignoring it. In fact, recent beats in economic data and sharp price increases across the commodity complex underscore the notion that the rise in inflation will not be transitory. The pop we could see in April would be only the beginning.

    As we approach $30 trillion in debt with more stimulus on the way, markets have to wonder what to make of CPI of 2.5-3.0% or higher. In our opinion, the US has no choice but to follow in the BoJ’s and ECB’s footsteps and repudiate higher rates until the end of time.

    10Y note futures reached a level at which we have felt would represent critical support. A drop below this level, we reasoned, would sound loud alarm bells. As we wrote yesterday: “This is quite possibly the Fed’s last chance to avoid a real mess in the bond market.”

    Bottom line, don’t be fooled by the Fed’s ability to repeatedly bail out equities at the last minute.

    The algos have learned well to respond to moves in VIX, currencies and oil/gas when they are so instructed. It’s no surprise that yesterday’s plunge was arrested at our previous SMA downside target.

    The problem is bigger and more difficult to cope with than most – including, apparently, the Fed – can imagine.

    continued for members…

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  • The Yield Curve Model: Dec 8, 2020

    One of my favorite market indicators is our yield curve model. It has warned us several times in advance of significant correctionsthis year.

    Warnings over the past few years have included:

    July 16, 2018: The Yield Curve Update – We were a little early. SPX closed at 2798 that day, rose to 2940 before crashing 20% by Dec 26.  The final 13% was signaled on Dec 5: The Yield Curve’s Warning.]

    April 25, 2019: The Yield Curve Model Warns Again – SPX gained 21 points over the next four sessions before quickly shedding 226 points.

    February 20, 2020: Buckle Up – SPX (which had topped out the day before) crashed by over 35% over the next month.

    August 25, 2020: Update on AAPL – We were about a week early, but the model signaled a correction which saw SPX fall 11%, followed by another 9% the next month.

    The recent breakout of the 2s10s is clearly a bearish signal – though it hasn’t yet paid off.  Is the model still working?  First, a little history. Among other things, the model holds that breakouts above significant resistance are bearish for equities.

    If we plot the 2Y and 10Y together, we can see that significant sell-offs in stocks were marked by more rapid declines in 2Y yields than in 10Y yields (i.e., a widening of the spread between the two.)

    The shaded areas below illustrate the period during which stocks experienced their most significant corrections between 2000-2013. Though the 2Y and 10Y both declined during these periods, the 2Y yields clearly fell faster.

    But, as we saw in 2015-2016 and again in late 2019, not all corrections involved a steepening. These selloffs occurred without the yield curve model signal being triggered. Did the model stop working?  Hardly. The decline earlier this year was a stark reminder of its predictive power.  What made these corrections different?  More importantly, what is the model signaling now, and how likely is it to play out?

    continued for members… (more…)

  • More Where That Came From

    We’ve been bearish on oil for quite a while, shorting it at 75.57 on October 3, 2018 after Jamal Khashoggi was dismembered and at each of the 3 subsequent peaks since then: just before the JCPOA breakup, the Abqaiq attack and the Aramco IPO — which should have been a peak, but resulted in a headfake “breakout” climaxing in the Al Asad attack.

    Last night, CL dipped to within 0.41 and RB within 0.187 of our next downside targets. As members know, these are critical support levels. A breakdown would be devastating to oil and gas and present stocks with very strong headwinds.Futures, now at 3260, are headed straight for our next downside target at 3200.Yes, the coronavirus is potentially a very big deal. But, this decline in oil and gas was baked into the markets over a year ago and is a strong endorsement for our inflation model.

    continued for members… (more…)

  • Does the Yield Curve Matter? A Closer Look

    I called a top in SPX on May 20, 2015 [see: The Last Big Butterfly] because it was about to reach the 1.618 Fib extension at 2138 — our upside target from way back in 2012.  SPX peaked the following day and fell over 300 points before it was all over.

    What I didn’t notice at the time was the bond market. We’ve focused on this from time to time, most recently on Dec 29 [see: Should You Fear the Yield Curve?]  We noted at the time that while the spread between 10Y and 2Y was dropping rapidly, it only represented a warning unless it bottomed out and rose rapidly.  From that post:

    …the above shows that while the potential is there for a recession, this is just an early warning at this time. If the yield curve bottoms out here and rapidly steepens, we’ll have a lot more to worry about.

    Two sessions later, the spread did bottom out, and has been on a tear ever since.  What does this mean?  Let’s look at how things unfolded in the past.

    The spread had been tightening since Dec 31, 2013.  It bottomed in Feb 2015 and began rising again.  In early May, it broke above a trend line (red, dashed) connecting its highs.

    About the same time that SPX was peaking, it backtested that TL and continued higher.  It broke trend (purple, dashed) around Jul 31, a few days before SPX fell off a cliff.  It broke down to new lows (the red, dotted line) in Jan 2016, about the same time that SPX bottomed out.What the yield curve said, then, in simple terms:

    – a breakout from the downtrend marked an equity top (bearish)
    – a breakdown of the subsequent uptrend was really bearish
    – a break to new lows represented a potential bottom (bullish)

    Before I go any further, I want to point out that there were four significant bottoms in 2015-2016.  The first two came close to backtesting the 1.272 Fib at 1823, but didn’t quite make it.  The second two did.Now, let’s look at the same period, but comparing the 10Y (TNX) itself to SPX.  Note that SPX peaked shortly after TNX reached the falling red TL, and began having trouble once TNX broke out.

    SPX fell off its cliff when TNX fell back through the rising purple TL, making bottoms each time TNX did. On Jan 20, 2016, TNX tested its Aug and Sep lows, at which point SPX bottomed at 1812.  A week later, TNX plunged below the previous bottoms and didn’t bounce until it reached the Jan 2015 lows (dashed, purple line.)

    The message delivered by TNX was slightly different from the 10Y2Y:

    – rising up to tag the falling trend line represents a bearish turning point
    – breaking out above it is okay, as long as the uptrend continues
    – a breakdown of the subsequent rebound is really bearish
    – stocks won’t bottom until TNX does

    If we look at the chart below, we can see that the 10Y tracked the 10Y2Y quite closely until it diverged in late 2015 in a failed effort to support stock prices.  It didn’t provide decisive support until it bottomed in Feb 2016 at its Feb 2015 lows.  For a few brief days, the divergence disappeared.Why is this even remotely interesting, you might ask?

    As in 2015, we have also experienced a huge divergence between the 10Y2Y and the 10Y itself.  This is noteworthy in and of itself.But, the comparison gets even more interesting.   As in 2015, we have had an extended slump (14 months vs 17 in 2015), a breakout above the falling red trend line, and a backtest of the trend line.The big differences, so far, are that the spread hasn’t gone on to new highs and that the (presumed) low came as spreads were peaking and only two weeks (versus 8 months) following the peak.

    But, so far, the lessons from 2015 are holding.  The breakout above the falling red TL definitely produced a drop in stocks.  The backtest of the red TL has occurred, but it hasn’t quite reached the purple TL.  As long as it continues bouncing and doesn’t drop back through that TL, stocks should be able to continue rising.  The day it drops back through it, things could get nasty.

    Next, let’s look at the current TNX chart.  We could look at the drop since the Mar 2017 highs, but it was rather short-lived and the subsequent rebound has resembled a moon shot.  Instead, let’s look at the big picture.

    A trend line from the 2008 highs connected with the 2010, 2011 and 2017 highs.  After reversing at each, TNX was accompanied by a large drop in stocks.  TNX’s reversal from its 2013 highs never produced a stock selloff; but, then again, it didn’t quite reach the TL.

    Zooming in a little, we can see that TNX reached this trend line a couple of times in 2017: first, in March, when its reversal accompanied by a mild 78-pt drop in SPX, and again on Dec 20 in a reversal which never gathered any steam.  TNX was back to and punched through the TL on Jan 8.  It reached another TL (gray) drawn through other recent highs on Jan 22 at 26.65.  This was a potential top, meaning the bond folks breathed a sigh of relief.

    On Jan 26, however, it popped up through the gray trend line.  Not so coincidentally, that was the day that SPX peaked.Remember our lessons from TNX in 2015:

    1. reversing off the falling trend line represents a bearish turning point – it didn’t reverse

    2. breaking out above it is okay, as long as the uptrend continues – it did, but as it approached 3%, folks started getting nervous.

    3. a breakdown of the subsequent rebound is really bearish – we got a potential reversal at 29.43, but it has a long ways to go before reaching the rebound trend line, currently at 24.40.

    Interestingly, that TL intersects the falling red TL at about 24.60 on Mar 13, the day that CPI for February is reported.

    And this is where it gets interesting.  If TNX continues to rally, bond folks and equity folks will get nervous (the fiscal fiasco.)

    If it were to fall to the rising purple trend line and backtest the red trend line at 24.60, it might be somewhat bearish unless: (a) it reflects a big drop in inflation (in keeping with my oil and gas forecast) and (b) it rebounds there.

    If it fell below 24.60, the TNX lessons suggest that SPX would be in big trouble.  With a Fed meeting a week later, we can assume Powell et al would be focused on preventing that from happening.  But, as our analog suggests, this preceeds an important inflection point by just a few weeks.

    If TNX falls through 24.60, remember lesson 4…

    4.  stocks won’t bottom until TNX does

     *  *  *

    Now, onto our analog update. In our initial post and follow up from Feb 6-7 [see: Analog Watch], we anticipated SPX would rebound from 2533 (our downside target) to 2765 by Feb 14 and 2812 by Feb 23.  Instead, it bounced from 2532.69 to 2742 on Feb 16 and to 2789 — 23 points short and 4 days late — by Feb 27.

    An adjustment was clearly necessary, given that SPX and ES bottomed on different days.  We’ll try to reconcile the two, along with some economic forecasts which are definitely outside the norm.

    continued for members… (more…)

  • A Break or a Breakdown?

    The 10Y yield has clearly broken trend as expected, with a couple of Fib tests the only things standing between it and our downside targets.  Our 28.56 upside target from Jan 10 [see: China – It’s Not Me, It’s You] has officially yielded. This is what stocks were waiting for — a sign that interest rates’ climb past 3% wasn’t as certain as most analysts suggested.  ES broke out of its slump and pressed on to new highs, finally joining SPX in regaining its 2.24 Fib extension.

    This leaves our analog on track with our next targets easily in reach.  It also confirms the time adjustment that was suggested by the most recent dip and the redrawing of VIX’s (and everything else’s) path for the next six weeks.

    continued for members… (more…)

  • Why Rising Rates Are a Problem This Time

    A sharp drop in interest rates has traditionally been a negative for stocks.  The chart below shows that most significant declines in 10-year yields over the years were associated with steep drops in the S&P 500.  Usually, equity losses precipitated the drops in yield.  As stock declines accelerate, money flows into bonds — raising prices and depressing yields.  The crashes of 2000-2003 and 2007-2009 are striking examples.  So are the corrections of 2010, 2011, 2015 and 2016.

    There were several exceptions, when stocks were supported through carry trades and other algo-stroking forces: the 15% rise in SPX between Dec 2013 and Feb 2015, the minor 6.1% drop between Mar and Jul 2016, and the 2.5% rise between Mar and Sep 2017.

    But, significantly, not a single equity correction occurred without a concurrent and significant drop in yields.  This begs the question, then, of whether increases in yields are positive for stocks.

    In 2008, yields bottomed almost 2 months before stocks did in 2009.  But, in the 2000-2003 crash, yields bottomed 9 months after stocks.  Most other yield rallies from significant bottoms also lagged stocks: 4 months in Oct 2010, 9 months in Jul 2012, 3 months in Jan 2015, 5 months in Jul 2016.

    It would seem at least some bond buyers take a “show me” approach, waiting until the coast is clear in equities before shifting money back into bonds.  This analysis ignores the considerable influence that Fed purchases had on bond yields — an influence which the Fed maintains will diminish over the next few years.

    So, what are we to make of the latest spike in yields which began on Sep 7, 2017?  The 10Y rose from 2.03% to 2.94% through Feb 21.  SPX rallied along with it, up almost 17% by Jan 26 — then promptly did a gut wrenching 11.8% nosedive in only 2 weeks.

    Fortunately for the bulls, it got a strong bounce off its 200-day moving average and subsequently bounced to its 61.8% retracement. But, pundits seem fixated on the 10Y with rates nudging up against 3%.  Does it matter?

    In a word, yes.  Even though 3% is still well below historical yields, the level of debt has risen dramatically over the years.  The chart below shows the annual interest expense (the orange line) and the US’ rapidly growing pile of debt. Superimposed over each is the average interest rate (the black line) paid on that debt.

    Even though interest rates have flatlined since 2013, the expense of servicing the rapidly expanding debt has risen sharply — recently breaking out to all-time highs.

    Clearly, if rates were to normalize the interest expense would be unmanageable.  How unmanageable, you ask?

    Between 2000 and 2007, the average interest rate was 4.84%.  On the current $20.6 trillion balance, that would mean an annual interest expense of roughly $1 trillion.  And, we haven’t even begun to talk about the effect on consumer debt, the mortgage market, debt issued to fund corporate buybacks, etc.

    Obviously, an increase in the 10Y yield doesn’t immediately reprice the entire pile of debt.  But, it’s a clear step in the wrong direction.  And, investors are right to be concerned.  I imagine the Fed is also quite concerned — which is why I put a target of 2.85% on the 10Y back on Jan 10 [see: China – It’s Not Me, It’s You.]

    Not only did it represent channel and Fib resistance, but it seemed like a good tipping point for what I expected to be rising concern (one can hope) about our shaky fiscal situation.  TNX overshot it a little, which has been fairly common over the years (Feb 2011, Sep and Dec 2013, etc.)

    Those previous overshoots typically helped stocks get past resistance.  It might work this time, too.  But, judging from the mood out there, I don’t believe stocks will be led higher by higher interest yields this time.  And, I have trouble believing the Fed isn’t working to put a lid on long rates – yield curve be damned.

     *  *  *

    Related Posts:

    Where To Next?
    The End is (Probably) Near
    CPI: The Charade Continues
    Update on Bonds: Jan 29, 2018

     

  • Update on Bonds: Mar 07, 2013

    If rates really are heading back up in the near future, we’d expect to see bonds take a hit (and stocks, too, but that’s a different post.)  Back on Jan 21, we focused on the 10-year treasury (ZN.)

    We observed that ZN had just completed a large Crab Pattern and broken down from a rising wedge, and appeared to be due for a “significant retreat.”

    The chart below shows a big Crab (grey), followed by another Crab (red), a Bat (white) and another Crab (purple.)  Each previous Crab Pattern completion has been followed by a significant retreat, so we might suspect one here with the purple pattern completion.

    Since then, both the purple and white channel lines have broken down, suggesting more downside ahead. The intersection of the white channel bottom and purple channel midline is coming up in early April, and prices have fallen from 132’160 on Jan 21.  But, where’s the “significant retreat?”

    Shifting focus to the 20-year as represented by TLT (just for grins), the charts show continued weakness over the next couple of months — provided TLT can push through some important support.

    The harmonic picture is negative enough – given the potential Gartley or Bat Pattern in play. But, the white and red channels have both recently surrendered a support line.  Backtests are complete, and the next support is down around the .786 at 114.5 — though I suspect the .886 at 112.26 will get the nod.

    Note that it intersects with the falling white channel midline, the falling red channel bottom and the large white rising channel midline — all around late May-June.

    A slight overshoot would tag the .500 at 110.18 on a larger harmonic grid (purple) and establish a Point B for a pattern that might lead prices back down below the white midline.

    The fly in the ointment?  Check out the dashed red trend line cutting across the middle of the chart. It has influenced a few turns, and is just below current prices at around 115.60.

    Stay tuned…