The Rude’s Month in Review: July 2021

Happy Friday!

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 asksean@paradigm.press 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

Still well above its 200-day moving average, the SPX shows no signs of slowing down just yet.  I’m still cautiously bullish.  Unless something drastic happens to the contrary soon, I reckon this might be a record year.

The Nasdaq

 

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.  Although there’s been a recent inflation scare, that’s done nothing to hurt the tech index.

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.  We didn’t have that big a month this month, but it hasn’t rolled over yet, either.

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.  Now it looks like it’s heading back downward.  The Fed must work extra hard to keep its foot on this rate if the Everything Rally is to 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 still holding above the all-important 90 level.  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.

Government Bonds

Using the TLT ETF as our proxy for government bonds, we’ve seen a substantial sell-off in the last year.  But we’ve just had a rally this month that was wholly unanticipated.  It looks like the market is shaking off the fears that come from the CPI and PPI exploding to the upside.  I must admit, I find this odd.  Up until now, I saw no reason for anyone to own bonds.  I may have to reevaluate that thesis if this continues.

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.  Again, we’ve had a decent rally here.  Bonds don’t look nearly as ugly as they did before.

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.  Although we’ve seen big rallies in the TLT and LQD, the HYG is less pronounced, almost certainly because they’ve barely sold off at all.

Real Estate

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. Although it’s well above its 200-day MA, it didn’t have the best month in June.  Perhaps it’ll take a breath over this summer.  That remains to be seen.

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.  After a furious rally, copper got smacked this June.  It was due for a sell-off, but this was quite a frantic sell-off.  Again, it looks like the market is shaking off those inflation numbers.

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.  I thought we’d head straight up to $2,020, but that didn’t materialize at all.  It looks like another wait-and-see for the yellow metal as inflation fears may be unfounded.

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.  It just can’t seem to get above $30, which is where it needs to be to launch higher.  I’d love to see it closer to $50, but we’ve got a long way to go before then.  For now, let’s hope it’s consolidating for a move up.

Cryptos: Bitcoin

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.   We haven’t rallied back as hard as the HODLers would like.  In fact, Ethereum has taken over as the hot coin for the moment while BTC licks its wounds.  It may be a bit of a crypto winter before we get back to the moon.

That Sums It All Up…

Ok, you’re caught up for this month. Understanding where we are in the markets is the first step to seeing where we might go.

I’m off to the Shangri-La on Mactan Island with Pam and Micah to celebrate our 10 year anniversary this weekend.

I’m sure you’ll enjoy the wonderful Fourth of July festivities.  I’ll raise a glass to you from across the world.

I’ll leave you with this:

Have a wonderful weekend!

All the best,

Sean

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