Bonds, Secular Bear Market: Impact on Small Caps

August 28, 2023

Mish's Daily

By Mish Schneider


Bonds have had one of the worst years in modern times and one of the fastest rates of interest rate rises.

The good news is the market has absorbed the bond’s performance.

A better risk-on environment is when the SPY outperforms the long bonds.

Same is true with junk bonds outperforming long bonds. Another indicator or risk on.

The yield curve remains inverted-or the potential recession indicator-has not to date caused a recession.

Hence talk of a soft landing.

Will yields tap out at 5.5-5.75%? Many think so.

However, higher for longer seems more likely.

Furthermore, Inflation is not quite done.

The PCE, due out this week, is at 4% not 2%

And just as it took from 2020 until spring 2022 to see inflation soar then peak, it is likely we will not see the impact on these rates until 2024 or even 2025.

Talking technical, bonds do not look likely to rally from here (TLT).

However, we are watching the October 2022 lows carefully.

A potential double bottom exists if TLTs can clear back able 98.

A move under 95 though, points more to a retest and possible break of the low 91.85.

How does this impact small caps?

Small caps as measured by IWM are key for the fall and into 2024.

You can also look at SML S&P 600.

Over the weekend, we covered that the Russell 2000 IWM could be forming an inverted head and shoulders bottom going back from the start of 2023.

First though, it must hold 180 and clear 190. No small task.

Small caps are related to commercial real estate, so that is a caveat.

Why could small caps do well?

The Government has spent a lot of money on US manufacturing-and the Dallas fed index fell less than expected.

In the US quest for more independence on goods, we must look to costs and labor for the trend to sustain.

It must be noted though, that prices and wages paid soared.

The IWM chart shows a lack of leadership thus far against the SPY.

The Real Motion Indicator has no real divergence from price.

Nonetheless, IWM needs more everything-more rally, more leadership, and more momentum.

Our small caps quant model has done well this year, buying companies with earnings growth.

The basket is an interesting combination of semiconductor companies, home building and beauty staples.

 

If you find it difficult to execute the MarketGauge strategies or would like to explore how we can do it for you, please email Ben Scheibe at [email protected], our Head of Institutional Sales. Cell 612-518-2482

For more detailed trading information about our blended models, tools, and trader education courses, contact Rob Quinn, our Chief Strategy Consultant, to learn more.
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Coming Up:

Mish will be on break August 30 and return Tuesday September 5th.

September 7 Singapore Breakfast Radio 89.3 FM

September 12 BNN Bloomberg

September 12 Charting Forward StockchartsTV

September 13 Investing with IBD Podcast

October 29-31 The Money Show

 

ETF Summary

S&P 500 (SPY) 440 now back to pivotal

Russell 2000 (IWM) Popped off the key support. 185 pivotal

Dow (DIA) Will watch to see if it can back over 347

Nasdaq (QQQ) 363 pivotal

Regional banks (KRE) Needs to hold 44 to be convincing

Semiconductors (SMH) 150 back to pivotal

Transportation (IYT) 239 still support to hold with 252 biggest overhead resistance

Biotechnology (IBB) Compression between 124-130

Retail (XRT) the 6-month calendar range low is 62.90-needs to clear it

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