Solid Start To The Trading Week (Technically Speaking For 4/4)

Bull And Bear Market Trend Bronze Castings

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The bond market sell-off has been broad and sharp:

Major ETFs that track the bond market

Major ETFs that track the bond market (StockCharts)

Since the start of the year, the entire bond market complex has sold off. That includes emerging markets (upper left), junk bonds (top row, second from right), municipals (top right), mortgage debt (middle left), and the entire treasury market complex.

Here is the performance table:

YTD performance of major bond market ETFs

YTD performance of major bond market ETFs (StockCharts)

The losses have ranged from shallow (in the case of floating rate bonds) to large (mostly higher duration and emerging market debt).

The central point to take from this is that the bond market is broadly selling off due to the combination of higher rates and the more hawkish Fed tone.

Is the bear market rally over? Opinions differ.

“The bear market rally is over,” Morgan Stanley Chief U.S. Equity Strategist Michael Wilson wrote in a note to clients. “That leaves us more constructive on bonds than stocks over the near term as growth concerns take center stage – hence our doubling down on a defensive bias.”

Wilson’s thesis is that the economy is heading for a sharp slowdown, due to a “payback in demand from last year’s fiscal stimulus, demand destruction from high prices, food and energy price spikes from the war that serve as a tax, and inventory builds that have now caught up to demand.” This less forgiving macroeconomic backdrop will become increasingly harder for investors to ignore, as it eats away at corporate profits.

“Geopolitics remains a wild card, but we do not see equities fundamental risk-reward to be as bearish as it is currently fashionable to portray,” JPMorgan strategists led by Mislav Matejka wrote in a note. While Morgan Stanley’s Wilson doubled down on his recommendation for defensive stocks, Matejka and his colleagues said traditional defensives “should not have legs to a bounce beyond the geopolitical dislocation,” advising an underweight position.

I looked at the technicals in my weekend market recap.

What is the natural rate of interest – the interest rate that neither stimulates nor contracts the economy?

One such measure is the Lubik-Matthes rate, which is calculated by the Richmond Federal Reserve:

Lubik-Matthes Natural Rate of Interest

Lubik-Matthes Natural Rate of Interest (Richmond Federal Reserve)

I have to admit that I’m skeptical it’s this low when inflation is so high.

Let’s take a look at two sets of charts

1-day SPY, QQQ, DIA, and IWM

1-day SPY, QQQ, DIA, and IWM (StockCharts)

The week is starting off right for the bulls. The SPY and QQQ moved higher at the open and kept rallying throughout the session. The DIA did as well, but it started underwater. The IWM moved sideways.

2-week SPY, QQQ, DIA, and IWM

2-week SPY, QQQ, DIA, and IWM (StockCharts)

At the end of last week, the SPY and QQQ formed reverse head and shoulders after peaking a few days before. Today, prices started a new move higher.

For this to be a new move higher, we’ll need to see all the indexes push through previous highs. Let’s hope the bulls stay out in force this week.

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