In my last piece, I wrote that the fall downtrend was coming. I took the liberty of not forecasting a specific time. I am now going to make a call that the turn will come any given day.
To my fascination, it is looking like bond yields could top out on today (November 7) just as they did on November 7 of last year.
11/7/18 – The US Treasury 30 Year Yield topped out at about 3.46% and began descent
11/7/19 – The US Treasury 30 Year Yield is at the top of channel resistance formed by last year’s move. The yield is currently 2.42%
What does this mean?
Think about stocks and bonds as competing for capital against each other. If bond yields rise then they can steal capital from stocks.
After bond yields peaked last year, stocks went on to fall. I marked 11/7/18 on the SPX chart.
Another way to think about this phenomenon of rising yields causing danger for stocks is from an economic standpoint. Companies need growth in order to afford their debt. Some GDP forecasts for Q4 are coming in as low as 1%. As growth slows, it is possible that companies can no longer afford prior amounts of debt service costs.
I would also like to touch on an outlook for gold. Gold competes with bond yields in the same way that stocks do. If yields rise, then bonds become more attractive relative to gold. Since I believe that the stock market will be under pressure due to bond yields, I think that the probability of a FED December cut will begin to rise as stock market pressure rears its head. Currently, a December cut is only priced in at 5.2%, which means markets believe that we will have smooth sailing into year end. If the FED language/market action changes the probability of a December cut to the upside, then bond yields should fall and gold should rise.
When the FED or other central banks ease, the concept of a “reflation trade” comes into play. Let’s examine if other markets are front-running the forecast that I am laying out. Good places to look are commodities and emerging markets. The reason is that FED easing is an opening of the dollar liquidity gates, which means that theoretically the dollar should fall, and assets that are inversely correlated to the dollar should rise. The Thomson Reuters/CoreCommodity CRB Index and the EEM have recently broken out.
I have a few other things to highlight. I have previously explained how the USD/Yuan cross-rate is a proxy for trade war risk. In my opinion, we are at a point of maximum complacency with the recent trade narrative and chart to confirm. This means that should things turn sour in the stock market, Trump likely won’t be able to use more good trade news to jawbone the market higher.
Regarding complacency, we are also at a place of extreme risk per VIX contracts. The VIX is the “Fear Index.” When it is low, the market is complacent. When speculators go short VIX contracts, they believe it will go lower. Times of extreme lopsidedness in this market have not preceded good results for stock market investors.
My last note is that things can speed up should the market turn. The market has had a series of gap ups (the elevator looking things on the chart). Markets do not like gaps. Markets like to fill the gaps. To fill the gaps we would need to go down, and these elevators could speed up the process.
