It’s All About Risk and the Long Bonds

October 23, 2023

Mish's Daily

By Mish Schneider

Monday, after a lot of spooky headlines, the SPY touched the 23-month moving average or the 2-year biz cycle breakout point right around 417.

Plus, TLT flashed green as did IWM, the small caps.

Now, the big question is can IWM close out Oct above 170?

If not, any rally will be short-lived.

Today was an interesting day.

SPY also cleared back over the 200-DMA which if holds, could mean more relief rally.

BUT-TLT reversing as well so what we don’t want is for the long bonds to outperform SPY.

Why?

That would be risk-off and recessionary
It would embolden the already bold commodities to run-especially with the dollar falling.

Which we see as #stagflation.

From a technical standpoint, yes, this is a mean reversion.

However, if you look back to July, it is the 5th oversold rally in TLT.

Sustainable?

The biggest fundamental dynamic is that inflation can go hyperbolic (it already is in certain soft commodities because of the geopolitical soup).

And, if the FED relaxes now, one must wonder if they will be caught from behind once again.

Nonetheless, for us the most important aspect to this is how TLT performs against the SPY and how HYG (junk bonds) perform against the TLT.

Bulls want TLT to underperform both.

Note the ellipses and text on the chart of TLT or the 20+ Year long bonds.

Back in March when we had the bank crisis flash crash, bonds signaled a flight to safety by outperforming the SPY starting March 7^th.

At the same time, the price was around 101.

Real Motion was showing a bullish divergence in momentum as TLT crossed over the 50-DMA long before the price did.

SPY crashed, and TLTs rallied to 109.10 in a matter of days.

Fast forward to today, TLT remains slightly underperforming the SPY.

The momentum indicator shows a mean reversion but not a bullish divergence.

Should TLT do what it did in March-outperform the SPY-take that as a warning.

That is a sign of risk off, and perhaps a harbinger of an oncoming recession-or worse, stagflation.

Let’s not freak out yet though.

It is always good to plan ahead yet act on price accordingly.

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 ben@marketgaugepro.com, 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.
-

Traders World Fintech Awards
-