There has been a tremendous amount of speculation circulating around whether the U.S. is moving into a recession. As many of our readers know, one of the things we like to look at as a forward indicator is yield curve inversion. Here Pension Partners' Charlie Bilello puts out an excellent graphic, which highlights the fact that it's been 13 years since the U.S. yield curve last inverted in regards to the US 10yr vs. the 3-month bill (-0.49):
Yes, we know the text book academic definition is two consecutive quarters of negative GDP, yet in today's increasingly predictive modeled world, nobody cares about after the fact! As you can see, December of 2006 was a full 2.5 years ahead of the two negative quarters of 2009.
With the ramp-up in money market flows, which transpired into record low U.S. yields, we can't help but think this panic buying of safety seems to have run its course. All the while the equity markets continued to show their resiliency, most likely on the hopes of this week's ECB meeting where we expect it to lay the foundation for future central bank largesse. Anyway, you could see the start of this week has seen some heavy momentum investing liquidation where value is being sought over growth. This comes on the heels of a disastrous under-performance all year long of the Russell 2000 vs. the S&P 500 and Nasdaq markets.
We have also seen liquidation in the U.S. bond markets, and metals have certainly lost their mojo. Anyway, we thought this chart depicts the last one-month asset flows, and they tossed in a recession forward indicator to boot:
So, before we get into some of the pairs trades, let's look at the U.S. 10yr and then gold as profit-taking has ruled the last few days!
As you can see, the 10yr has pulled back from the 132-16 highs and has fallen continuously; we peg 129-14, nearly 3 full points off the highs, as near support. Now looking at gold, we see a similar profit-taking move:
Gold is down over $70 and is at risk for falling all the way back to key longer-term supports at $1,460. Now let's get into some further analysis of the move into value over growth here which by the way has seen the Russell 2000 get smoked vs. the S&P 500 and Nasdaq for the greater part of this entire year. Is this a reversal of this trend? Maybe, but we feel that since money is so concentrated now, reversals take a long time to work themselves out and that this is just the beginning of more to come.
For us, it feels like risk is being taken off the table here in terms of the Nasdaq as the tech heavy index is certainly under the scope lately, especially in terms of anti-trust and censorship rhetoric making its way around DC these days. Anyhow the next two charts are a couple of Magnelibra prop charts that we use to gauge real contract dollar risk of one asset vs. another. First up let's look at the RTY vs. S&P 500 1:1 pair trade. You can see dollar for dollar actual gain/loss here:
As you can see, the S&P 500 futures outgained the RTY by nearly $16k this year. This chart set-up may just be the beginning of a move the other way. As far as RTY vs. Nasdaq, we look at it with a 2:1 ratio; long 2 RTY vs. short 1 NQ:
As you can see from Feb., the RTY has lost some $23k from that $9k high. Is the momentum over for tech outperformance? Speaking of the Russell 2000, let's look at a nice tech chart here:
This box is about as clean as we can get, and if the overall market is going to attack new highs, it will have to come with a breakout of the RTY out of this channel. Just to be fair, the downside will be ushered in with the unfortunate roll-out below the 1,425 area!
So what charts are looking good? Well, energy has piqued our interest. A few weeks ago, we noted the base of Nat Gas forming a possible break-out above 2.25 may see some follow-through. Well, here is the latest chart. We took a longer view chart just to show you how far Nat Gas has fallen:
We also like Crude Oil as it has broken out above $56, but continues to be plagued by $59, which we feel is the first order of business for a renewed bounce to attack 2019 highs of $66:
Ok, so that pretty much does it. We have a few other items to note this week. Illinois just came out with a terrible picture of its fiscal net position. Let's just say the chart speaks for itself:
Finally, we saw this cartoon on Twitter, and we had to post it. We have no idea where it came from, but we think it points out a very simple and sensible way for anyone to understand our current central bank policy administration of control. Enjoy and till next time:
Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha-driven strategies. Alternatives offer the investor a unique opportunity at non-correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well‐rounded approach to managing their long-term portfolio.
With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence-led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks. It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks. We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do. Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.