2022-???? Bear Market to be labeled as: Bond Bust!
Recession, Stagflation, Inflation, Dollar Strength, Russia/Ukraine War...how about labeling the current market turmoil what it really is; A Bond Bust!
As you can see from the monthly chart below, in Jan 2022 the US10YR Yield bullishly broke the neckline of an inverse H&S that formed between June 2019-Jan 2022; then in March of 2022 it broke up again from major downtrend line. (I wrote a post about this in March 2022 saying we were in "Unchartered Territory" and the US10YR must be watched).
If the Inverse H&S plays out it means we will see interest rates in the 7.5-8% range at a minimum in the near term. (Two things worth noting: 1. Nothing about this chart is bearish nor can you say it is showing any signs of reversing anytime soon when looking at it from a long term perspective. 2. Based upon charting theory-H&S patterns usually play out IF they are formed at tops or bottoms)
Most people think of bonds as a "relatively safe" investment vs. other types of investments so when you have the below loss on a "relatively safe" investment it should send out shock waves:
2022 YTD TLT LOSS: -34.12%
TLT High to Low during current bear market (Years 2000-2022): -48.89%
A 20 year US Bond ETF losing almost 50% within 31 months should be shocking AND, as stated above, yields are not showing any signs of reversing!
Here are the YTD Losses, as of Friday, in the US Indexes.
NDX: -30.08%
RUT: -19.29%
SPX: -19.04%
DJI: -10.99%
Would you have ever thought that TLT would outperform NDX in YTD losses during a bear market? Before 2022, I think 99.9% of traders would state this would be impossible. And yet...here we are with only two months left in 2022.
Now to the monthly charts of the DOW/DJI. I wanted to have a look at this chart since it has held up relatively well to see how the current monthly chart compares to other bear markets (Defined as a greater than 20% decline close to close). The green line on the charts is the 15 SMA...I also added some horizontal highs/lows based upon the high/lows of the last time price made an ATH and then closed below the 15 SMA and then back above it BEFORE a bear market formed. No two bear markets are the same so it's really about the relationship of the 15 SMA and the horizontal pink & red lines...what this analysis tells me is we will most likely test the March 2020 low at some point in time...we might come back up and re-test the ATH or go a little above it but statistically speaking if you look at the bear markets of the last 100 years in the DOW a new bull market is not us! Oct 2022 could however provide a temporary low! (Exceptions: 1917 & 1987 bear markets)
Key take aways:
1. The US10YR Yield; followed by the other common known Treasury Yields, should be the most discussed topic and how those charts affect money flows into different types of investments instead of all the other FUD out there! Remember: Money chases yields.
2. The chances of us re-visiting the Covid lows in the DOW are high given the above analysis.
3. NDX doesn't like high Treasury Yields as it's currently the weakest of the US Indexes and very weak compared to the DOW. Its history isn't as vast as the DOW so its anyone's guess as to how low it could go or how long it could take to make another ATH. It's not an Index I'm looking at buying anytime soon as Yields have made a clear signal that the 40 year downtrend has ended so we need to change our thinking in this new environment!
4. January seems to be a topping month while October seems to be a bottoming month however that is probably just a coincidence as this was not the case in the early 1900's.
There is a lot to take in above so I hope it makes sense after you think through it...I know it's not a quick read!
As you can see from the monthly chart below, in Jan 2022 the US10YR Yield bullishly broke the neckline of an inverse H&S that formed between June 2019-Jan 2022; then in March of 2022 it broke up again from major downtrend line. (I wrote a post about this in March 2022 saying we were in "Unchartered Territory" and the US10YR must be watched).
Most people think of bonds as a "relatively safe" investment vs. other types of investments so when you have the below loss on a "relatively safe" investment it should send out shock waves:
2022 YTD TLT LOSS: -34.12%
TLT High to Low during current bear market (Years 2000-2022): -48.89%
A 20 year US Bond ETF losing almost 50% within 31 months should be shocking AND, as stated above, yields are not showing any signs of reversing!
Here are the YTD Losses, as of Friday, in the US Indexes.
NDX: -30.08%
RUT: -19.29%
SPX: -19.04%
DJI: -10.99%
Would you have ever thought that TLT would outperform NDX in YTD losses during a bear market? Before 2022, I think 99.9% of traders would state this would be impossible. And yet...here we are with only two months left in 2022.
Now to the monthly charts of the DOW/DJI. I wanted to have a look at this chart since it has held up relatively well to see how the current monthly chart compares to other bear markets (Defined as a greater than 20% decline close to close). The green line on the charts is the 15 SMA...I also added some horizontal highs/lows based upon the high/lows of the last time price made an ATH and then closed below the 15 SMA and then back above it BEFORE a bear market formed. No two bear markets are the same so it's really about the relationship of the 15 SMA and the horizontal pink & red lines...what this analysis tells me is we will most likely test the March 2020 low at some point in time...we might come back up and re-test the ATH or go a little above it but statistically speaking if you look at the bear markets of the last 100 years in the DOW a new bull market is not us! Oct 2022 could however provide a temporary low! (Exceptions: 1917 & 1987 bear markets)
Key take aways:
1. The US10YR Yield; followed by the other common known Treasury Yields, should be the most discussed topic and how those charts affect money flows into different types of investments instead of all the other FUD out there! Remember: Money chases yields.
2. The chances of us re-visiting the Covid lows in the DOW are high given the above analysis.
3. NDX doesn't like high Treasury Yields as it's currently the weakest of the US Indexes and very weak compared to the DOW. Its history isn't as vast as the DOW so its anyone's guess as to how low it could go or how long it could take to make another ATH. It's not an Index I'm looking at buying anytime soon as Yields have made a clear signal that the 40 year downtrend has ended so we need to change our thinking in this new environment!
4. January seems to be a topping month while October seems to be a bottoming month however that is probably just a coincidence as this was not the case in the early 1900's.
There is a lot to take in above so I hope it makes sense after you think through it...I know it's not a quick read!
Comment:
After looking over the above chart I really which I would have used arrows to show exactly what I am mean in regards to the pink/red lines and why history says we will most likely re-test the Covid low at some point in the future! If you look at all the previous bear market charts I posted above they all re-test the red line of the previous RANGE (which is defined by the pink/red lines) with the exception of two bear markets; 1917 & 1987.
Comment:
Lastly, the previous range (pink/red lines) was defined as follows: It had to have two or more months close BELOW the 15 SMA. Then I used the pink line for the previous ATH and the red line for the low. That was the last known established "range". Hope this all makes sense...let me know in the comments!
Comment:
From a charting perspective within the Dow...the time period of 2000-2002 seems most similar...bond bust vs. dot com bust. Both "busts" are producing a similar play within the Dow. And it makes sense...money rotating away from bonds goes into the Dow. In 2000 money was rotating away from internet stocks/NQ and into the Dow. It took "time" before a bottom was made by re-testing the lower range (red dotted line) but it eventually did re-test this line just as I suspect we will eventually re-test the covid low.
Comment:
Just like in the dot com bust; we just re-tested the blue dotted line so it makes sense that we might get almost to the 35,492 area before we reverse again. (The green line-15 SMA is flattening out on the monthly). The holiday's could spike the Indexes up more in the hopes of Santa coming to town.
Statistically speaking if you look at the bear markets of the last 100 years in the DOW a new bull market is not UPON us! Oct 2022 could however provide a temporary low.