It’s All About Risk And The Long Bonds -

It’s All About Risk And The Long Bonds

Oct 23, 2023Jeremy ParkinsonFinance0

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) performs 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.More By This Author:Market Has Stress Fractures But No Clear Breaks Unclear Which Way Israel-Palestine War Will GoWhen News Moves So Fast, Stocks Can Stand Still