Too early to tell whether last week’s action will live in market history as the Fitch top or a trap for the bond bulls. The selling from the stock markets key reversal on July 27th resumed on August 2nd in reaction to Tuesday’s unexpected downgrade of US debt by Fitch Ratings. There was also a key negative reversal Friday in the yield of the 30-Year T-Bond.
There has been much in the news about the large long bond position of some hedge fund and money managers who “had accumulated the biggest bullish position in more than a decade in June” according to JP Morgan Chase.
The sharp surge in yields since the July lows accelerated last week as the yield on the 30-year T-Bond rose 25 points in just three days. This triggered sharp declines in the interest rate-sensitive sectors. The 30 Year yield moved above those of the 2 -Year and 10 -Year yields as the better-than-expected monthly jobs report helped spur a reversal. The 30 Year T-Bond yield closed Friday at 4.21% after Thursday’s close at 4.310%.
Last week’s action will be a challenge for the markets in the week ahead as bond traders have been trying to adapt to the change in BOJ strategy as well as the downgrade of US debt. The Treasury auction of 3, 10 and 30-year debt is expected to total $103 billion. The demand in the recent auctions has not been that strong with investors already worrying about Thursday’s CPI report.
Lots of red last week led as the Dow Jones Utility Average was down 5% as it did not hold support as I expected. That is why everyone needs to use stops to protect their positions when they are wrong. The Nasdaq100 was the 2nd worst performer for the week down 3% while the S&P 500 as well as the Dow Jones Transportation Average declined 2.3%
The Dow Jones Industrial Average held up better than the iShares Russell 2000 as it lost 1.1% versus 1.2% while the SPDR Gold shares were also lower for the week. The NYSE market internals were negative with 1940 issues declining and just 1140 advancing. On the Nasdaq Composite, the A/D ratio was even more negative.
The daily chart of the Spyder Trust (SPY
PY
SPY
The negative A/D numbers last week dropped all of the daily A/D lines below their MAs but did not change the positive weekly analysis. The daily S&P 500 Advance/Decline line closed below its WMA but just above the support at line c. There is more important support from the February and May highs at line b, that are expected to hold. The on-balance-volume (OBV) has also dropped below its WMA consistent with a possible short-term top.
It was not surprising that the Invesco QQQ
QQQ
The Nasdaq 100 Advance/Decline line has declined below its gradually rising WMA but is still well above the converging support at lines b and c. Once the A/D line begins a clear downtrend then students of the A/D analysis can start to look for a turning point.
The relative performance (RS) closed below its WMA and is still in a range while the weekly shows a strong uptrend. A drop in the daily RS support at line d will suggest that QQQ is no longer leading the S&P 500.
So if rates continue to move higher do stocks have to decline and what is the message from the recent action in the bond market?
Since January 2023 I have often argued about why I thought many market strategists had a too negative outlook for the stock market ( Archive of articles) Since that was the prevailing opinion in the financial media I was worried that many investors would avoid stocks as a result and it appears that this was the case.
The record-breaking short position in the S&P futures has resulted in losses in the hundreds of billions. This happens too frequently in financial markets as often well -funded investors or investment funds can stay too long in these crowded trades. Now we apparently have another start of the year forecast for 2023 that is also not working out well for investors.
The “year of the bond” argument in December took advantage of Wall Street’s certainty about the coming recession in 2023. This would be a negative for the stock market and a recessionary economy should increase the demand for bonds not stocks.
It seems like several money management firms, as reported by Bloomberg, “are keeping the faith that a rousing fixed-income rally is coming.” That was the thought at the start of the year. Of course, if yields keep climbing then bond fund investors could see a decline in their principal.
For many years, it has been my view that investors think that investing in bond funds is the same as investing in bonds. That is not the case since bond funds rarely hold bonds to maturity so investors may not get their original investment back when they sell their fund assets. Holders of individual bonds are often able to hold to maturity.
The surge in bond yields pushed the ProShares Ultrashort 20+ (TBT
TBT
I have also included a comparison of the performance of the SPY to TBT. The wide gap between SPY at 24.1% to TBT at 1.54% clearly identifies why those who were counting on the year of the bond and sharply lower yield are not likely to be happy with their performance so far this year.
A further decline in the SPY and QQQ from last week’s close is likely to move the A/D lines into the correction mode. If instead, we see another pushback towards the recent highs on strong market internals then there is a chance we will see another push to the upside.
Before the stock market correction starts worrying investors the move higher in yields is likely to get some of the blame. Given the current technical outlook for stocks and bond markets now is the time to become more defensive
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