A New WAG

This is the first iteration. I have not considered the time, only the form and potential price areas.

30-Year Bond Symmetry

Let's see if the dip comes or not. I closed out some TLT calls earlier in the week because it hit a horiztonal. TLT has more a dip that argues for a bullish turn immediately, whereas ZB would still need a dip to fully reflect the down move. It doesn't have to be a symmetric move though. The expected move is higher and any dip should be limited.

黑兔年

Black Tuesday

Black Monday

Year of the Black Rabbit

A different look at the HYG/TLT ratio. The candle forming is confirming at top.

Bond Ratio and Targets

The ratio of HYG and TLT looks to be finally reversing. There is a gap on HYG near $75. A trip back to the 2007 ratio high map to TLT at $101. A trip back to the next resistance line gives a $105 target. If HYG goes higher, there are yet higher targets possible. A 50 percent retrace of the TLT drop since June gives a possible target of $105. Given this context, I see a fairly high probability of TLT moving above $100 as long as the general move in bonds is higher. What interests me about bonds is that, as I had expected this summer, eventually inflation and the broader economy weaken enough for an extended bond rally. That could produce targets upwards of $120, with a backtest of TLT's former long-term support possible up around $130 in the event of a disinflationary or better (for TLT), deflationary recession.

Inflation Inflation Inflation

The most interesting chart today is ZB and the reversal in treasuries. It has made it back to my initial target level at 121. Above and there's a potential base in place. I've been holding some calls since Monday that were a short-term trade with possibility. The big question going back to the summer for me has been: when/will bonds signal a shift to deflation? Home prices are down on schedule, but as I've discussed before, the government inflation indices may not capture this until as late as early 2023 if Larry Summers has it right.

Copper and oil have stabilized with the markets. These factor into the "big question" beccause inflation is hard to kill. The 1970s saw the Federal Reserve take their foot off the rate hikes when recession hit and the CPI reversed, but it never made it back down. Result: endemic inflation.

As for the market, I don't think we're in an uptrending market with earnings season volatility. I'm not convinced in a rally yet. My current thinking is the transition scenario where the economy moves from inflation to deflation, bonds rally and stock market bulls and maybe commodity bulls (less successfully) interpret this as bullish. Then around January, the reality of deflation sets in. Contra that, the Cleveland Fed has been hiking thier inflation forecast for October. Maybe this rally gets garrotted like it has the past couple of months.

Putting the Bear Market in Perspective

Look at the ratio of SPY to TLT, and SPY to ZN the 10-year treasury futures.

Short Every Rip

The stock market has been grinding lower and keeps taking out important support areas. If you look at the 1 minute chart or similarly short timeframe, you can see multiple hits on the ES at 3700 and 3680. There is resistance at these levels as well. Which way will the market go?

This trendline is incredibly important for whatever reason.

There is heavy call buying after previous high put buying, pushing prices way up.

The long-bonds continue cratering.

USDJPY has been hitting new highs day after day, but the Korean won paused. A resumption of highs would be bad news for bulls because the Chinese yuan will follow.

Gold made a new low this morning. It is going to plummet along with most other assets given how bonds and the U.S. dollar is behaving. It seems like everything is being suspended to prevent options from paying off at this month's opex.

The counter explanation is stocks are leading what will be a rally in all assets, including a reversal in the U.S. dollar, but the fly in the ointment remains stubbornly strong crude oil.

I posted a list of stocks last night. These are stocks that fell on high volume yesterday. There are a lot of symbols I've posted in previous months, going back to late last year. Many of these charts are already way down, yet also only now completeing topping patterns that point to far larger losses ahead. Point being, there are more targets than capital at this point. It's a shooting gallery for bears out there. If the indexes resume their move to new lows, there will be massive losses in the less liquid sectors of the market.

We Have a Ding

ZB hit my measured move target today, based off the non-lockdown peak. On many charts, but not all, I ignore both the March 2020 panic move and also for commodities, the Russian war spike. These can't be wholly discounted, but since they were such brief moves, I treat them as low information unless they fit into a pattern. One way it could fit in would be a mirror spike down in market panic. That would take ZB down to the 113 area.

A similar move in TLT would take it to the $90 area.

I have talked about that target before. Here on August 31:

With the caveat, if bonds continue lower, a breakdown in ZB and breakout in 30-year yield correlates with about 5 percent interest. That isn't a crazy target when considering the Federal Reserve is talking about a 4-percent Fed Funds rate. I do expect deflation and a rally in long bonds, but if I'm wrong, it isn't a wild target. It would take ZB and TLT back to 2007 levels of around 110 and $90 per share. Note that TLT is dividend adjusted, remove that and you will see TLT at $90 when the yield was around 5 percent.

I'll also not that the new buzzword from Fed watchers is a 5 percent Fed funds rate.

HYG-TLT Ratio Breakout

New all-time high. The argument for a breakout is that we get a sovereign debt crisis that takes U.S. government bonds down more than corporate bonds, including junk. HYG also leading against investment grade bonds in LQD though. That only makes sense if the economy is much stronger than the data reflects. Place you bets.

With dividends stripped, the ratio also broke out.

A case can be made for HYG outperforming TLT in an inflationary environment that is also strong economically. The converse view is the oversold reading suggesting a reversal. HYG is sitting above long-term support, while TLT and LQD have broken down. As a ratio trade, I'd look for a reversal in the ratios. Whether that is more long TLT or short HYG I can't say for certain, but I'm buying puts on HYG.

Tight stops. I expect a downside move to be almost immediate.

One Path to a Market Crash: Credit Spreads

High yield credit is outperforming government debt as it did into the 2007 peak. What's amazing is credit has been deteriorating unlike in 2007. The low in 2007 was below the 1997 low, and it produces a peak in the HYG/TLT ratio. The current high is being made with credit risk sitting at the "get out of stocks now" line.

TLT isn't an appropriate comparison fund for HYG in most cases because there's a big duration mismatch, 20 years versus about 5 to 7 years. U use it because it is volatile and these two funds are sort of companion ETFs for income investors the past 13 years. You buy TLT in the corrections, and HYG at the lows. With that in mind, here's another way of expressing this relationship. The high-yield srpead divided by the 10-year and 5-year treasury yields. They're both approaching lows seen in September 2018.

Think of it this way. The decline in interest rates this year has taken companies up to the starting line of panic in the credit markets. Any follow through will trigger the type of fear normally associated with recessions and credit events. At that point, it doesn't matter if treasury yields fall except that falling yields will keep panic limited to corporate bonds.

High Yield Debt Still in Positive Divergence

Amazing that high-yield is diverging positively from investment grade bonds even as it has been moving lower. Positive divergence the past few days as well.

Huge PPI Miss

Markets are calm after a huge PPI miss (in my opinion). I expected PPI would come in cool because of falling commodity prices, and thereby set-up a strong rally into tomorrow's CPI report that would either fail miserably or trigger a melt-up squeeze before giving way to new lows. There is still a risk of a cooler CPI for bears, but the odds of that are lower following the PPI.

ZH: Food Cost Jump Sparks Hotter Than Expected US Producer Price Inflation

Ex-Food, Energy, & Trade, PPI rose 0.4% MoM (double the expected +0.2%).

Both Goods and Services PPI are rising with Food increases dominating...

Finally, we note that the pipeline of PPI pain is easing further as intermediate goods inflation eased further...

Inflation is cooling for sure and monetary effects are lagging. Yet remember what Powell said this summer (paraphrasing), "We don't really know anything about inflation..." Yesterday, this article went viral on finanacial social media: Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn

Traditionally, the Fed set policy based on forecasts of inflation, which lags behind changes in output. But officials now are reacting more to the latest inflation data “because they have absolutely zero confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citigroup. He said he is concerned the Fed will overdo rate rises but concedes inflation in the service sector is “pretty concerning.”

I don't see how a central bank cannot overdo it when fighting inflation because it is the only way to be sure. They have to nuke inflation from orbit. The added factor is that they don't trust their inflation forecasts. Every month that doesn't show collapsing inflation is a month that doesn't cause any doubt about rate hikes at the Fed.

My scenario for this year is that inflation does cool, but then accelerates in 2023. Another scenario that will take longer to develop: the market sinks even as inflation drops because the Fed won't change course. Real interest rates will accelerate via falling inflation. Assume the Fed pauses at 4.75 percent. If CPI falls from 6 perecnt to 3 percent, real interest rates rise from -1.25 percent to +1.75 percent. In bear markets, all macro scenarios result in lower stock prices.

Not much has changed with charts the past few days. Some charts remain important such as USDCNY because I still expect a possible yuan depreciation, but that's not chart-centric. Instead, ZB looks the most compelling because it is sitting near the 52-week low. It is also coming within spitting distance of the measured move off the topping pattern (yellow horizontals indicate the top and the target). Note I am ignoring the March 2020 spike when measuring the top.

I've been wrong about ZB, TLT and government bonds finally catching a bid as the market drops. However, if there is a capitulation drop coming this month, then I envision ZB making a quick drop to around 121 before recovering, but equities continue falling. This "safe haven" behavior will indicate equity investors are finally capitulating and also turning to the "safety" of bonds. Safety in quotes because this year has shown they are not safe. The shift in psychology will be investors deciding bonds are safer than stocks. 

If I'm wrong, so be it. I have no position on TLT at the moment. I will also note TLT broke my lifetime support line. It's also possible a twin crash happens in stocks and bonds simultaneously.

TLT at Lifetime Support

DING DING DING What Does It Mean?

I updated the DING DING DING post, discussing the prior peaks and reversals. I see this stuff in the midst of the day's action and alarm bells go off, but fully digesting it takes time. To hammer home the implications, here are crude and stocks layered alongside this ratio.

It's always possible the ratio goes higher before turning. Or even going far higher than anyone anticipates. Yet the latter would mean the public has faith in junk bonds as it loses faith in the credit of the United States. That strikes me as unlikely at this juncture.

DING DING DING DING DING DING DING DING

Update: Charts don't really need an explanation, but I thought I'd give one now that I have time. The trade here is long TLT and short HYG, or straight short HYG given context. Or you use it solely as an indicator. However, here's some added context on the peaks in the chart.

The touches that form the trendline are are in June 2007 and February 2011. Lows in the stock market: March 2009 and September 2011.

Other peaks:

January 2014. Markets bottom in January 2016.

October 2018. Markets bottom in December 2018. I think this one might be most relevant here as it also saw QT and rate hikes. The ratio itself didn't bottom until March 2020 though.

Now.

I expect an imminent meltdown in the markets, but the history of this indicator also says the bear market low is well into the future.

Reversal Wednesday

I remember days like this in 2022. The stock market rallies hard, but bonds are blown to smithereens and crude oil surges. The structural makeup of the market turned very bearish, yet bulls kept piling in and bears were chased out. I did have a good day trade that more than offset all my losses elsewhere.The main trade besides that was adding more energy short positions.

Update: This chart shows the raito of USO and TLT, along with SPY/QQQ ratio. Then it is USO/TLT inverted with SPY. This looks like late May to me.