Bust Out 1980s Analogs: Yield Curve Inversion Breaks Post-Volcker Lows

Boom. That is all 2-year plunging (yield rising). The 10-year and 30-year bonds are flat at the open on Sunday night.

2000 and 2008 Bears Say Rally Done, 1929 and 1973 Might Agree

If the 2000 and 2008 bear market experience holds, this rally is done. It does not mean stocks drop immediately. In early July, I looked at the bullish percent indicator.

I saw a positive divergence on the indexes again and expected a rally. Now let's see if it has room to go. Here is the BPSPX for 2000, 2008 and current market:

There is a caveat: the data doesn't go back to the early 1980s or the 1970s. However, we can use BPSPX as a signal. The Nasdaq has been stronger in the rally, but has a much lower overall bullish percent though also in "overbought" territory. None of the prior bear markets produced bullish "breakouts" as bullish percent climbed. They all made lower highs.

I think there is one more push higher possible, but the March high holds. As soon as bullish percent rolls over, I will start becoming aggressively short if I cannot find any non-confirming signals from the price charts and indicators. Some other indicators: the PMO and 200-day moving average. There are some pushes above the 200-day EMA during declines, but they are brief.

Bullish Percent Peaking

I looked at bullish percent back in early July to forecast a rally. Now is it telling me the rally is done.

Another Low Volume Day Shaping Up

These charts show weekly bars and volume. I am scaling into puts for September and October. AAPL the only one of these I bought puts on today.

Buying TLT

My stop is today's low.

Update: Best Case for Bears Today

The best case scenario for bears today is a big miss on jobs. That should trigger a melt-up in stocks because the main pillar of the "it's not a recession" crowd has been employment. The Federal Reserve also cited employment as a reason not to slow rate hikes. Those arguments come crashing down if employment misses big. My only concern in that scenario is the market tends to process this information slowly. Stocks probably rip into the open because rate hike odds would tumble. This should spark the final move higher in the bear market rally. Commodities might rally too based on fewer rate hikes and bonds should rally. The yield curve might have another surge into deeper inversion. Even if it went on for a few days, bears who bought puts for September and October today would probably have decent profits by mid-to-late August. Best case though is a final run here because the market is primed to be stupidly bullish.

Another way that scenario plays out is one more vicious squeeze of the bears with a dip and then rip. NQ would test its support around 12900 and ES would test the low of the prior week range, before going back up.

A very strong jobs report would probably weaken bonds and strengthen the dollar. Eventually, trades related from that would play out. I'm not sure how stocks would react in the short-term. Probably up because that's been the general direction.

Finally, the jobs report is ulimately meaningless. It's one data point. Most likely the report will be within the range of estimates making it also somewhat meaningless for traders. All it will do is remove uncertainty. Instead of ultra-low volume as we saw yesterday, volume will surge as the market zooms towards its intended target. Only in rare situations such as we are in now can a jobs report act like a 2x4 across the face of investors, traders and policymakers.

BTC and ETH are hinting that markets want to run.

Jobs were almost double expectations. This is a macro disaster for stocks with yields surging and the yield curve inverting even more, should it hold. I never trust the first move though. Buckle up! Should be a wild day.

Solana to One Dollar

The symmetry isn't as nice, but I see what is forming now as the corrolarly to what formed on left side. Support will break and eventually back to $1 area.

Hmm: Low Volume Days Since December

Three were tops and one came at a low. In all four cases, the low volume day marked a turn in the market's direction.

And scene...

No charts for the close because I have no idea where the markets might go tomorrow. Giving it a charts tag thoguh, since if you use that tab to navigate the site (did you see the menu above?) this is what you're here for.

I closed my weekly XLE puts today, still have my $70 strike monthly puts. Still have YCL calls, MPWR, EWT, FCX and AAPL puts, along with the mining stuff. Rest is cash waiting to short, or maybe go long if it looks like there will be one last crazy run higher. The only long-term puts I have are Sept MPWR and October FCX, small Eurodollar call position for October, plus some "dead" GDX calls for Sept that I am looking to unload on the next miner spike. Everything else expires this month as I plan a portfolio overhaul for round 2 of the bear market.

Biotech vs Energy

My first pick for the rally was biotech and I said short energy was the trade of the second half.

June 17: If You Gotta Buy, Buy Biotech. IBB up 17% since then, XBI closer to 28 percent.

I mentioned short energy as the second big trade setup of 2022 back in late May. It then moved into full bloom in June.

Remembering this pair, I thought to look at biotech versus energy. The verdict: even more confident in the deflation, short energy call. Biotech beat energy in 2008 too, and there's now an inverse H&S on the ratio chart.

If you think you can't chart ratios, here's XLE and SPY.

This ratio points to around $40 for XLE with the price ratio falling back towards 0.10 versus SPY. If support holds it might stop at 0.15 which would be bullish. If SPY is down around $300, that tranlates into $30 to $45 for XLE.

Inflation Cheat Sheet

People have their economic hobbyhorses and they can't separate their grocery bill from financial markets. I'm done debating with people. Inflation has peaked in the short-term, both July and August CPIs will be rather low, on pace for maybe 3-percent annualized. If crude falls like that topping pattern says it could, the target is $50 area, inflation is done for good. If I'm wrong then I'll go long! I don't care which way it goes, but I care to look and see what the tells me and what my understanding of economics says. Betting on deflationary collapse is still very cheap because very few traders and investors, outside of the bond market, are looking for it.

The AUDUSD correlation says $30 could be the target for crude oil. That gap is going to close one way or another and right now I'd bet oil comes down bigtime.

Confirming NYFed DSGE Model, BoE Warns of 2 Year Recession

Back in June, Jeff Snider pointed out the NY Fed's DSGE model predicts 2 years of recession. GDP might not recover to 2021 levels until 2025 or later. This is a dynamic model, but this is the midpoint of the range of possible outcomes. The economy could be far stronger or far worse. Looking at data such as yield curve inversion, past history of commodity price spikes and so on, I expect worse.

If the U.S. has it bad, Europe could become a wasteland. BOE Raises Rates by Most Since 1995, Warns of Long Recession (Archive link)

The Bank of England unleashed its biggest interest-rate hike in 27 years as it warned the UK is heading for more than a year of recession under the weight of soaring inflation. The pound fell.

The half-point increase to 1.75%, predicted by most economists, on Thursday was backed by eight of the central bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed.

“The committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response,” Governor Andrew Bailey told reporters in London. “All options are on the table for our September meeting, and beyond that.”

The pound slid after the move, which was accompanied by warning that a UK recession will begin in the fourth quarter and last all the way through next year.

The BOE also boosted its forecast for the peak of inflation to 13.3% in October amid a surge in gas prices, and warned that price gains will remain elevated throughout 2023. That will sharpen a cost-of-living crisis that will see real disposable incomes fall more than at any time in around 60 years.

Europe is in far worse shape because of the Russia sanctions. The could alleviate price pressures by backing off the war, otherwise things will play out as they predict, but probably worse. Since the U.S. is already in recession, it isn't going to be helped by the UK and Europe weakening. Maybe the U.S. can recover sooner, or maybe China will as in 2008.

Here's the DSGE model. I disagree with their forecast because I doubt there will be two years like the past six months, a mild recession that goes on and on. Instead, it should have some point where things reach a peak. That said, the model also doesn't predict much growth after the economy bottoms out. The growth out of that recession is also expected to be mild, meaning it could take another year or two to get back to the prior peak of GDP. Looking at an economic downturn as the time to recapture prior peak, this could be the longest recession since the Great Depression.

For more of my thoughts on the economy, see It's Not a Recession. It's a Depression.

Zone of Confusion

The market will keep rising with crude oil falling until it realizes that falling crude oil is bad news. Right now, the market is still cheering falling inflation. It doesn't yet realize this is the early stage of plummeting prices.

Poor Baizuo

Tragically hilarious. Newsweek: Zelensky Makes Public Plea to China's Xi Jinping After Calls Unanswered

In an interview with Hong Kong's South China Morning Post published on Thursday—his first with an Asian news outlet—Zelensky said he had sought a direct line to his Chinese counterpart, Xi Jinping, since the Russian invasion began more than 160 days ago.

"I would like to talk directly. I had one conversation with [President] Xi Jinping that was a year ago," he told the Post's Amy Chew. "Since the beginning of the large-scale aggression on February 24, we have asked officially for a conversation, but we (haven't had) any conversation with China even though I believe that would be helpful."

How sad is it that the Ukrainian people have suffered and died because they have a clueless GAE puppet for a leader? How stupid is Zelensky to not understand Russia and China are aligned and he is a tool of GAE aggression?

Yen Still a Go If Bonds Cooperate

Yen futures with ZB.

Final Run of the Bulls, You Can Hear the Salmon, Let Gold Be Your Guide and Crude Goes

Yesterday was a macro disaster for stocks. It was a bullish day, but damage in commodities and bonds signal this rally is running out of fuel. Going to run through a lot of charts today, all after the jump. 

For myself, I am always early. I closed out the biotech trade when it got into that consolidation range. I had July puts so it wasn't a bad trade, but then I also closed SMH calls and they've run as well. I've done fine with other positions such as short oil, long treasuries, and long yen, but I say to this to be clear: my WAG targets for the rally initially were 25 percent for Nasdaq and around 2000 on the Russell 2000 as my charts show. They might get there and that is a risk for bears. 

That said, I'm buying puts here for September and October. I have a big "crash" trade on FCX and I'm looking for more trades like that. If Apple fills its gap, I'm really not kidding when I say that's a retirement line. I'm going all in at that point as long as nothing has changed to shake my outlook.

On to the charts.

WTI Crude at Freefall Starting Line

2s10s Ratio Already Near 1980s Low

Since rates are so low, maybe a ratio of 2s10s makes sense. Presently, the chart would be at 0.88 based on where the 2-year and 10-year treasury yields are at this moment. This chart is updated through yesterday's close. The absolute low for the ratio (from available data) was 0.84 in the early 1980s. A couple more days like today will get there. The normal spread has much further to go before it hits the 1980s low of negative 2.41. To put that in perspective, the 10-year would have to plummet to 0.71 percent while the 2-year remains at today's 3.12 percent. If the 2-year drops, the only way to match that early 1980s spread is with a negative yield on the 10-year treasury.

Snack Empire

Still holding this one.

Apple All-Time Overvalued Level

The gap between economic reality and stock valuations is reaching new extremes. Apple is barely down 10 percent, but accounting for where macro and the overall stock market has moved, the stock is more "overvalued" today than it was in January. I put overvalued in quotes because value investors might say it was more expensive another time. I'm looking at it from a trading perspective. If the market heads to new lows, Apple will make a new low. For example, if SPY hits $340, I expect Apple will be at $120 or lower.