Hey There Income Hunter,
I always stress how important bonds are to the overall market signals.
Well, this week might have been the turning point in interest rates heading back to higher levels (they’ve whipsawed around a bit of late as the Fed lurches forward).
Everything was great heading into Thursday, and the market was still flying higher after PPI followed CPI’s big miss lower.
Then it rolled over, led by the Invesco QQQ Trust (Ticker: QQQ), which had rebounded by midday, but plummeted once poor results of the US Treasury 30-year auction were released just after 1 p.m.. Have a look at QQQ …
This is a very important signal, when we just received the best inflation news we could have hoped for …
Today, I’ll take a deeper dive into what it means for the markets.
Very Interest-ing
US interest rates are the most important indicator in the world.
First, they’re the price for borrowing money. Credit cards, mortgages, car loans …
You name it and your cost of borrowing is measured off the US Treasury interest rate curve.
Interest rates are also a critical component in the valuation for mega-cap tech stocks since their forward price is measured off future cash flows and interest rates are a major input for the calculation.
Let’s look at the correlation between 10-year rates and QQQs …
Pretty cool, right? … Plus, notice how the current QQQ rally turned on Thursday right at the 2022 downtrend line.
Now, not jumping to conclusions, but if QQQs break the low from Wednesday’s CPI report, we could be looking at a classic bull trap, which is when a market reverses and traders must exit positions with unexpected losses.
The bond trend to lower yields could be over. So what does that mean for markets?
- Higher rates are supportive of the dollar. I like being long the dollar right now against the euro, which is under serious pressure due to the damage the economy is absorbing from the energy crisis.
- Obviously, higher rates are the worst for the tech growth stocks but also hurt the stocks in general.
- Higher rates are really bad news for the US government who must pay interest on its $32 trillion in debt. For every 1% that interest rates rise the US budget deficit rises $320 billion dollars.
Bring It Home
Keep an eye on the bonds and look for QQQs to break below the low from Wednesday’s CPI report …
That may be the signal that bulls are trapped and may be forced to get out …
Always remember one of my most important trading signals: It is not what the bond market accepts that’s important, it’s what it rejects.
This week may be the week the bond market rejected good inflation news and caught many traders wrong-footed.
Have a great weekend and as always …
Live and Trade With Passion My Friend,
Griff