Day Hagan Tech Talk: “The Name’s Bond”
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Summary
Worries over fiscal discipline, immigration policies, the recent strong employment report, and several other issues drove the 10-year U.S. Treasury yield above 4.80%. When the Fed started lowering interest rates on 9.18.24, the 10-year yield stood at 3.70%. Who’s missing what?
Not James but the 10-Year
Economist Merton Miller once wrote, “Everybody has some information. The function of the markets is to aggregate that information, evaluate it, and get it incorporated into prices.” In a similar vein, John Roque has often quoted Robert Soros, who many years ago said, “the bond market never lies.” That is what Wall Street has been contending with since the Fed started lowering interest rates last September. Who’s missing what? Figures 1 and 2.
Tin Man in The Wizard of Oz would rust when exposed to rain, tears, or other moisture. Do markets (stock, fixed income, housing, etc.) know something/see something the Fed doesn’t? Are they seizing up like the Tin Man?
Figure 1: Domestic Interest Rates - multiple time frames. |Are markets seeing something the Fed isn’t?
Note: The comments below, about Figure 2, were written prior to the release of the CPI report earlier today. Also, certain bond market sentiment indicators used by Ned Davis Research have either 1) reversed up from extreme pessimism levels or 2) are close to entering such. All to say that on a short-term basis, yields could fall and bonds rally.
Figure 2: 10-Year and 30-Year U.S. Treasury Yield (weekly data). | Higher for longer. Though short-term, the next yield move is likely to be a pullback/consolidation period.
Figure 3: 30-Year and 15-Year Fixed Rate Mortgage Average. | Unless a breakdown below support occurs (green lines), are things seizing up like the Tin Man?
“To better understand what this means for homebuyers, Bloomberg’s Michael McDonough charted the trajectory of monthly mortgage payments based on reported mortgage rates. For a $500,000 home, a new homebuyer is paying about $2,100 a month today versus about $980 at the 2020 low.” ~Sam Ro.
“Mortgage demand is crumbling. For the week ending January 3, mortgage loan applications for purchase sank 6.6%, the 4th decline in the last 5 weeks. The level of conventional purchase apps [is the] lowest since 2011!” ~Renaissance Macro Research
Seasonal Volatility: 2025
Seasonal studies should complement other forms of analysis (technical, sentiment, macroeconomic, fundamental) and other models/ indicators (Catastrophic Stop Loss, internal equity market measuring tools discussed in these reports). In late November 2024 we featured Figure 4, which implied a difficult/choppy start to 2025. Currently adding to the choppy backdrop may be portfolio rebalancing, potential 2025 tax bill selling/profit taking, and equity/fixed income recalibration.
Figure 4: Dow industrials Four-Year Presidential Cycle. | Choppy and difficult periods, but as the year progresses, a stair-step higher.
Having spent the holidays in Virginia, I was starkly reminded why I prefer Florida, even with its problems. Maybe in the cold it was me who was seizing up! See Figure 5.
Figure 5: Natural Gas – Continuous Contract with 10-week MA. | Hello!
Gap Support: Tested and Held
While a lot of overhanging selling pressure (resistance) exists in all domestic equity market proxies (depicted by red lines and lower price peaks in the charts below), important short-term support has been tested and held. A violation of support will increase the odds of further downside probing. Figures 6-9.
Figure 6: S&P 500. | Important short-term low/support level—5773.
Figure 7: Dow Jones Industrial Average. | Critical near-term support has tested and held thus far.
Figure 8: Small Cap proxy ETF. | Support depicted by green and blue lines, resistance by red lines and previous price peaks.
Figure 9: NASDAQ Composite. | It feels like NASDAQ has more downside probing before an initial and important support level is tested ~18,500+/-. Also, please note the rising 200-day MA (support) is currently just under 18,000.
Considering the charts above, and those highlighted over the past month or so, while the Catastrophic Stop Loss Model favors equities, it may be prudent to incorporate a strategy that has some built-in risk management parameters, relative to both sector and equity versus cash allocation decisions. Reach out for a discussion about our Smart Sector Strategies, which include both types of shock absorbers.
Side Note
MAGS ($53.57), a recommended guidepost to discern if and when the Large Cap Growth heavy proxies decline further (SPX, NDX, NASDAQ), tested and held its rising 50-day MA support line, highlighted last week. On a short-term basis, it is important that the rising 50-day MA holds and isn’t decisively violated. Currently, the 50-day MA is $53.19 but subject to changes each day given how it is constructed. MACD (momentum) remains negative, so I wouldn’t be surprised if support is violated. Please reach out if you’d like to see an updated chart.
Please let me know if you would like to schedule a call to discuss the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies. Disclosures and Fact Sheets can be found here: https://dhfunds.com/literature.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 01.13-14.2025. Chart source: Stockcharts.com unless otherwise noted.
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