The next direction of the long bonds is crucial in determining the macro.
First, after a wrecking ball crash and ahead of the FOMC, we could surmise that a bottoming-like action defines the last several trading days.
Our Real Motion indicator shows a mean reversion.
The 10-day moving average (cyan line) has not been pierced since September 1.
Hence, with the rally in SPY (up .60%) and TLT closing slightly red (-.20%), we can say that as our Big View ratios go, risk remains on.
With so many different opinions, watching what TLT does versus the SPY makes it simple enough for you to form your own opinions about bonds, inflation, soft landing, recession, or-WHAT WE THINK- stagflation.
If bonds remain underperformers to the SPY, even if both fall further from these levels, it keeps a risk on the environment intact.
Although, if stagflation becomes more obvious, it may not necessarily mean that equities are attractive to buy and hold.
Should TLT begin to outperform SPY, and we imagine TLT clearing the 10-DMA is a good start especially if SPY begins to sputter, than we can more readily say recession is in the cards and again, stagflation might be the more appropriate term.
The Dollar (cash index illustrated).
Although the dollar rose from July until the peak high last week, until it fails 105.50, this correction from the peak looks like that, a correction not a top.
What has been so interesting is how the stronger dollar has given angst to foreign countries dealing with a higher chance of recession than the US is dealing with.
However, certain commodities are unphased such as cattle, oil, sugar, and orange juice. While other commodities are more impacted such as gold and grains are more muted.
In a stagflation environment, the dollar, and the long bonds (yield curve) could stay steady for longer.
Commodities can still rise because of other conditions (war, weather, unrest, etc.) yet equities will most likely remain in a trading range or at least test a support level, with yields and the greenback strong.
If the dollar and yields fall, commodities and equities can rise together, but at some point, commodities can continue going up until the rates are forced higher again.
It is a slippery slope for the FED and investors.
Stagflation is the most difficult economic condition to reckon with.
ETF Summary
- S&P 500 (SPY) 435 resistance
- Russell 2000 (IWM) 177 resistance
- Dow (DIA) 338 resistance
- Nasdaq (QQQ) 368 pivotal
- Regional banks (KRE) 39.80 -42.00 range
- Semiconductors (SMH) 150 resistance 143 support
- Transportation (IYT) 237 resistance 225 support
- Biotechnology (IBB) 120-125 range
- Retail (XRT) 57 key support if can climb over 61, get bullish