The Rude’s Month in Review
I hope you had a restful holiday this weekend.
Here’s the monthly review I promised you. I tried to keep the charts as simple as possible, with as few technical indicators as I could to tell you a clear story. Please write to me at firstname.lastname@example.org with any questions, comments, or suggestions if you’d like me to include anything else.
Without further ado, here we go.
The S&P 500
Nothing really changed at all since the last time we talked about the broad US market index. Still well above its 200-day moving average, the SPX shows no signs of slowing down just yet. I’m still cautiously bullish. As we only had a massive correction just over a year ago, I’m not sure why so many are calling for a crash.
The Nasdaq has been screaming north since March 2009, with brief breaths taken at the end of 2018 and the Covid crash. Other than that, it’s been leading the market, as perhaps the biggest beneficiaries of the Fed’s largesse. (That VC funding is awfully cheap nowadays.)
The Russell 2000 (Small Caps)
As you’d expect, the small capitalization stocks had a choppier rally since March 2009 than the large caps. But since the Covid crash, the small caps exploded to the upside. It’ll need to take a breath sooner or later, but there’s no reason to be bearish on this segment of the market.
The US 10-Year Yield
The 10-year yield is important to watch for a few reasons:
- The UST 10-year bond is the benchmark bond for the US market.
- Its yield affects mortgage rates and corporate borrowing rates.
- Volatility in its yield brings volatility to the stock market.
So when we have a significant spike, as we did after Covid, heads turn and we pay attention. But for the last couple of months, the 10-year seems to have settled, and maybe, will resume its long-term downward trend.
The Fed must keep control of rates if the “Everything Rally” will continue.
The Dollar Index
To review, the Dollar Index is a trade-weighted basket of currencies against the USD. Those six currencies are the Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona.
The USD is at an important level. Already down 8.07% year-to-date, the dollar index needs to hold at this 90-ish level, or it can fall off significantly. As the Fed wants to keep rates down, that will keep pressure on the dollar. As rates fall, investors are less likely to hold dollars, as their returns are meager and they’ll seek higher returns elsewhere.
The Dollar is hardly almighty anymore. If the dollar index breaks below 90, first it may find support in the low 80s. After that, the low 70s. By that time, gold and bitcoin will probably have rallied to the moon.
Using the TLT ETF as our proxy for government bonds, we’ve seen a substantial sell-off in the last year. That corresponds with the rally in the 10-year yield, as government bonds are sensitive to changes in yields. I’m not a big fan of holding government bonds right now, as inflation fears will only intensify the sell-off.
Investment Grade Corporate Bonds
Investment grade bonds are those bonds with a high probability of returning funds to its creditors. For S&P, those bonds are the ones with credit ratings AAA to BBB-. For Moody’s, it’s Aaa to Baa3. This chart looks similar to the government bond chart above, but with a less pronounced sell-off. Bonds are still my least favorite asset class right now, as we’re at a crossroads when it comes to rates.
High Yield/Junk Bonds
High yield, or junk, bonds are those with low credit ratings. Below BBB- and Baa3 for S&P and Moody’s, respectively.
Though we’ve had sell-offs in government and investment grade corporate bonds, high yield bonds seem to have rallied right past them. As high yield bonds are less sensitive to rates due to their higher credit risk, they act more like equities than bonds at times. This is one of those times.
As the Fed has kept rates down, the spread between government bonds and junk bonds has tightened considerably. Oddly enough, these bonds look like the safest place to be in the fixed income world, if you must.
The low rate environment gave real estate investors a big boost after the financial crisis of 2006-2008. Since 2009, the property market experienced only the Covid sell-off, and has since broken its prior highs.
Base Metals: Copper
You need copper to build pretty much anything of value, so it’s a wonderful leading economic indicator. Dr. Copper has rallied hard, above its prior all-time highs, in recent months. Part of the rally may be inflation, part may be the recovery. I’d say look out because of the steepness of this rally, but you don’t want to sell into it, either. Proceed with caution.
Precious Metals: Gold
After former Chancellor of the Exchequer Gordon Brown told the world he was selling off England’s gold – an event forever known as the “Brown Bottom” – gold rallied for a decade straight. From 2011 to 2018, it looked like gold was lost. Suddenly gold rallied to new highs, before having another sell-off. That whole episode looks like a huge base. We’ve since sold off, but recent activity points to another rally to at least $2,020. If we get above that level, there’s not much stopping it; certainly not current Fed policy.
Precious Metals: Silver
Silver’s base isn’t nearly as developed as gold’s, but that makes the story all the more interesting for you. Silver looks like it’s consolidating and that means it could break higher with some force. If it gets above $30, I’d look for it to achieve its previous all-time high of $50. If it breaks above $50, to the moon we go – unless the Fed finally decides to take the punch bowl away.
Any talk of asset classes from this point forward must include cryptocurrencies. There are just too many big players in the market now to ignore it.
I’ll only cover Bitcoin for now, as it’s the Big Kahuna. Bitcoin has rallied “to the moon,” as the kids say, until April this year. We had a pause in April and then a horrendous sell-off in May, where BTC lost nearly 50% of its value.
HODLers, as the holders are called, will hold forever with their “diamond hands.” Some view this as irrational, but they think they’re holding a future world currency.
Most of the fair weather friends are already out. The next few months will be interesting to watch to see if we’re going to get a quick rally back to $60,000 or if we’re going to lump it for a bit.
That Sums It All Up…
Ok, you’re caught up for this month. It’s been a whale of a time, especially if you’re in crypto. But understanding where we are in the markets is the first step to seeing where we might go.
Have a great day today!
All the best,