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Long Bonds Bottom Out: What Does it Mean for the Stock Market?

Published 09/14/2023, 03:07 AM

I doubt any of our readers are too surprised by the CPI reading coming in a bit hotter than expected.

The bulk of it was in energy costs.

Food costs were mixed with bread and meat up while eggs and milk were down.

Services inflation was up slightly, while shelter costs were down slightly.

All in all, without some black swan event, we can begin to look for normalization of interest rates to core inflation.

Most economists and analysts believe that the federal fund's effective rate target will hold steady at its current range of 5.25% to 5.50%

With core inflation close to the current Fed funds rate, many economists are talking about normalization or a point where the rates are high enough to control inflation.

If that is true, it seems to us that the public will have to switch the mindset from rate cuts to rate pauses at around 5%, as this is more in line with a healthier economy.

As long as the S&P 500 outperforms long bonds (TLT), risk is on. TLT Daily Chart

Was there damage from the rapid rise in rates? Sure.

Nonetheless, we do not want rates much lower, nor do we want them higher.

What we want is a long duration at the current levels of inflation and interest rates with no surprises.

Of course, that is the rub.

No surprise means wage inflation and strikes, geopolitics, BRICS, mother nature, trade wars, and so on all must behave.

This is why we are monitoring the TLTs so carefully, especially as they perform against the benchmark.

Our Leadership indicator shows TLT still underperforming the SPY.

Our Real Motion indicator shows a mean reversion in momentum that happened in late to mid-August. Interestingly, it corresponded with a bottom in the TLT which, to date, is holding up.

The momentum phase is bearish, along with the price.

We want to see the momentum and price flatline, neither spiking higher nor going lower from here.

On price, the July 6-month calendar range low is well overhead at 98.80.

Ideally, to see a good rally in the indexes, we want that normalization.

But we don’t always get what we want, right?

Maybe the Fed has.

And maybe this is the calm before the storm.

ETF Summary

  • S&P 500 (SPY) 440 support 458 resistance
  • Russell 2000 (IWM) 185 pivotal 180 support
  • Dow (DIA) 347 pivotal
  • Nasdaq (QQQ) 363 support and over 375 looks better
  • Regional banks (KRE) 44 pivotal
  • Semiconductors (SMH) 150-161 range to watch
  • Transportation (IYT) Needs to get back over 247 to look healthier
  • Biotechnology (IBB) Compression between 124-130
  • Retail (XRT) 62.90 the July calendar range low broke down along with IYT-2 negative signs and an indication of stress on the consumer

This is for educational purposes only. Trading comes with risk.

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