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Monday, after a lot of spooky headlines, the SPDR S&P 500 ETF (SPY) touched its 23-month moving average (MA) or the two-year biz cycle breakout point right around 417.
Plus, the iShares 20+ Year Treasury Bond ETF (TLT) flashed green as did IWM, the small caps.
The big question is, can IWM close out October above 170?
If not, any rally will be short-lived.
Today was an interesting day.
SPY also cleared back over the 200-day MA, which if held, could mean more relief rally.
But, TLT is 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 again.
Nonetheless, for us, the most important aspect of 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.
At the same time, the price was around 101.
Real Motion showed a bullish momentum divergence 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, that is, 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.
This is for educational purposes only. Trading comes with risk.
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October 27: Live in-studio with Charles Payne, Fox Business
October 27: Live in-studio with Yahoo Finance!
October 27: Recorded in-studio with Investor’s Business Daily
October 29-31: The Money Show
Weekly: Business First AM, CMC Markets
November 1–13 VACATION
ETF Summary
- S&P 500 (SPY): 417–420 support
- Russell 2000 (IWM): 170 now in the rearview mirror
- Dow (DIA): 332 support pivotal
- Nasdaq (QQQ): 351 recent low and support
- Regional Banks (KRE): 35 next support
- Semiconductors (SMH): 140 support.
- Transportation (IYT): 225 pivotal
- Biotechnology (IBB): Under 120 so 110 area next support
- Retail (XRT): 57 key support still
Mish Schneider
MarketGauge.com
Director of Trading Research and Education