Big chart levels getting tested or broken
Some big levels in markets are being tested today or have broken. I’m on vacation right now so I’ll just do a quick rundown of some charts:
10 yr Treasury yields tested the big psychological level of 5.00% and then backed off, helped by a tweet by Bill Ackman saying that he has closed his short 30 yr bond position. The market is giving him credit for making a good call by going along with his trade. I am personally still bearish bonds and think they have a long way to go before we see the high in yields.
The S&P 500 is sitting on daily horizontal support at 4200 and closed below the 200 dma. It tried to break 4200 this morning but rebounded thanks to yields easing off the highs. I’ve been bearish equities and believe we are about to accelerate to the downside.
The Russell 2000 has been underperforming the S&P 500 and Nasdaq, as its constituents are more sensitive to higher yields (particularly the small to medium banks in the index). We are sitting on support that goes all the way back to July 2022, and I think we head lower from here. I went tactically short futures today at 1687 with a stop at 1710.
The Nasdaq is also sitting on daily horizontal support and it won’t take much to push it lower.
Bitcoin is surging to new highs of the year on optimism that the ETF will be approved. I hoped that higher yields and lower risk appetite would provide a dip for me to go long, but sometimes life doesn’t give you everything you want. Crypto has not been following global macro all year anyway. We have a bullish fundamental driver, a breakout from a defined and long-lasting consolidation pattern, and positioning that is overall bearish or neutral, so I have no choice but to be bullish and long here.
USD is diverging from US real yields. DXY is weakening while real 10 yr yields remain elevated. This may be due to expectations that the Fed is done hiking on the short end. Brent Donnelly has a good piece about how FX might be listening more to the short end of the yield curve than the long end.
Gold has completely diverged from real yields due to the Israel-Hamas conflict. The chart below shows gold in yellow and the inverse of real yields in blue. Prior to Oct 7, gold was tracking real yields. After the conflict, gold squeezed violently and didn’t back off despite yields pushing to new highs. It’s unfortunate that I stopped out of my longs, but I couldn’t have foreseen Hamas attacking Israel and igniting a war in the Middle East, so I’ll try not to be too hard on myself.
I do, however, want to go long gold again on a dip, as we may be entering a new regime where real yields on the long end don’t matter as much. Since Oct 7, gold and USD have been driven more by geopolitics and expectations of the Fed’s terminal rate, which means that long end yields might not matter as much going forward.
In the medium term, we may be 3-6 months away from the Fed being forced expand its balance sheet again, which would be extremely bullish for gold and BTC. This scenario could be triggered by depletion of the reverse repo facility, bond market dysfunction, more failed banks, or a severe drawdown in equities.
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