Long Bonds Signal Risk-Off as S&P 500, Russell 2000 Struggle: What’s Next?

10/24/2023

2 minutes read

2023.10.24 03:14

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

Plus, flashed green as did , the small caps.

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

TLT-Daily Chart

If not, any rally will be short-lived.

Today was an interesting day.

also cleared back over the 200-DMA which if held, could mean more relief rallies.

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 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 of this is how TLT performs against the SPY and how (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 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 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.

ETF Summary

10/24/2023

2 minutes read