Federal Reserve Chairman Jerome Powell has come under increasing pressure from President Trump to cut interest rates by as much as 100 basis points. The stock market now expects Powell to bow to Trump.
Wall Street’s consensus may be right — that the bubble in the stock and bond markets may inflate further — but prudent investors ought to be prepared if Powell is defiant. If he is, expect carnage in the stock market. Let’s explore this issue with the help of a chart.
Please click here for an annotated chart of long bond ETF TLT.
Please click here for a chart of S&P 500 ETF SPY. Those with portfolios heavy in technology may want to use a chart of Nasdaq ETF QQQ.
Note the following:
• The chart shows that there has been a parabolic move in bonds.
• The chart shows that as the parabolic move progressed, RSI (relative strength index) became extremely overbought.
• After RSI became extremely overbought, it traced a divergence, as shown on the chart. This was a classic sell signal.
• The chart shows that The Arora Report gave a signal to short-sell the bond ETF. The Arora Report also gave a signal to buy leveraged inverse bond ETF TBT for those who could not short. Inverse ETFs go up when bonds go down.
• The chart shows that the trade is profitable so far.
• Our plan is to take risk-control measures to protect profits.
• Stocks have gone up as bonds have gone up on expectations of a rate cut.
• The rally in stocks has been tempered due to concerns about the yield-curve inversion.
What does it mean?
Several simple facts have not gained much publicity in the media. Professionals already know this but mom and pop ought to pay attention.
• Traditionally the Fed can control short-term rates.
• Just because the Fed lowers the fed funds rate, it does not mean that long bond yields will also fall.
• The Fed does have tools to impact the long bond yield but they are not routinely used in the U.S.
• Generally the yield curve inverts because short-term rates go up while long-term rates do not go up.
• This time it is different in that the yield curve has inverted because long-term rates have fallen due to heavy demand for the long bond….Read more at MarketWatch.
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