By Todd Stankiewicz CMT, CFP, ChFC
1/ Recession Probabilities
2/ Long Bond Exhausted
3/ US Dollar Index (UUP) Potential Top
4/ The S&P500 Index is Looking for Support
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1/ Recession Probabilities
As the saying goes, the bond market is the “smart money.” Because of this we should heed the potential message the treasury market is sending us. The 10-year minus 3-month treasury yield curve has inverted to the deepest levels in over 4 decades. The recession probabilities in the lower chart are directly calculated from the 10-year minus 3-month treasury yield spread in the top chart, looking 12 months forward. This means that the recession probabilities today are based on the yield curve from 12 months ago. This deeply inverted yield curve is resulting in the highest recession risk probabilities since the early 1980’s. This has been a very reliable indicator over time of recession risk. The recession periods are marked in grey.
There has been a lot of discussion about this time being different, and it may be different, but it is still too early to tell. To truly confirm the soft landing, we need to see the yield curve normalize and recession risks abate while avoiding an economic downturn.
2/ Long Bond Exhausted
During September, the 30-year treasury yield (TYX) jumped to the highest level since February 2011. It spiked to 4.67% from 4.2% at the end of August. With this move, the yield is now bumping into a myriad of resistance levels. The first level is where the long bond yield rallied and failed in May 2008, May 2009, March 2010, and then February and March of 2011. The second resistance level is the upper Bollinger Band.
These resistance levels are also coinciding with an overbought monthly Relative Strength Index (RSI) at 73. Additionally, there is a bearish divergence present. This is where the most recent yield moved to a higher high while the RSI made a lower high. Remember, bond prices move inversely to yields. When yield declines, the price of the treasuries will increase as a result.
There is a high probability that long dated treasury yields at least take a pause at these levels, but more than likely we could see lower yields in the short term. If there is a move lower, look for a potential retest of the most recent break out at 4.2% (yellow support line). If the 30 year fails to find support here, it would put the blue support line in play around 3.45%.
3/ US Dollar Index (UUP) Potential Top
The recent rise in treasury yields has pushed the Invesco DB USD Bullish Fund EFT (UUP), a proxy for the US Dollar index (DXY), into extreme overbought conditions and increases the potential for a short-term top. The most recent candle is a shooting star. This indicates a level where the bears have taken control and reversed a bullish candle. I believe the bulls are exhausted at this level.
Earlier this week the bulls pushed UUP above the upper Bollinger Band, indicating it was overbought. In line with this, the weekly Relative Strength Index (RSI) also moved into overbought conditions as it has increased above the important 70 level. This raises the probability that weakness will occur at the current levels. Watch for a retest of the middle Bollinger band at 28.62. If it finds support at this level, the expectation is that it recovers to the upper band to potentially resume the uptrend. A failure here could mean a move to the lower band at 27.54. A decline in the US Dollar index could potentially be a tailwind to non-US Dollar investments.
4/ The S&P500 Index is looking for Support
The S&P500 index (SPX) weekly chart is searching for support after breaking below the middle Bollinger Band. At the same time the RSI is breaking down below the 50 level, which indicates a potential trend shift for the index. It will be important for the S&P500 index to find support at the lower Bollinger band level of 4190. If support is established and it bounces, we will see if the index can regain control and move back over the middle band. A failure to hold the lower Bollinger Band will increase the possibility that it rides this band lower.
This is like what happened in January 2022. The index found initial support at the lower band and bounced back to the middle band before ultimately failing at the resistance and riding the lower band to one of the worst years for the index since the Great Financial Crisis. Know your levels as they relate to your risk.
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Originally posted 2d October 2023
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