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TradingEdge Weekly for Sep 23 - All or nothing days, spiking yields, inverted curves, seasonal swings
This week, investors continue to suffer wild swings. This year has seen a near-record number of all-or-nothing days. Part of the reason has been rising rates, with new highs in real rates. Yields are breaking out across the curve, and more than half of Treasury yield curves are now inverted, a sure recession signal. Stocks are still facing some seasonal weakness before the positive election cycle kicks in.
Leading indicators are rolling over
The Conference Board's Leading Economic Index declined annually for the first time since 2020. A member of the Composite Recession Model that monitors this broad measure of leading indicators triggered a new warning signal. After similar alerts, stocks struggled, especially on a long-term basis.
The heart of the election cycle approaches
The most favorable portion of the four-year election cycle lies directly ahead. Does that mean the market will be heading higher? Not necessarily. But the historical results are compelling.
The Composite Recession Model issued a new warning
A TCTM Composite Recession Model member, which monitors economic activity in the housing market, triggered a new warning. After similar signals, stocks struggled, and the odds of an economic contraction increased.
Treasury yield curves show recession ahead
More than half of Treasury yield curves are now inverted, and the median curve is negative. Every time that's happened, recession was soon to follow. Our Macro Index Model is confirming that outlook. Under similar conditions, stock returns tended to be weak up to a few months later, but not necessarily after that.
Gold miners enter the danger zone
The Gold miner sector has collapsed in recent months. Some traders now see this sector as undervalued and due for a strong bounce. However, sector seasonality suggests that investors remain patient and wait a little longer.
Three months in, an odd mix of leading sectors
Three months after the S&P 500 bottomed in June, an unusual mix of leaders and laggards has emerged. Discretionary stocks don't often lead along with Utilities, but that's what we've seen. An analysis of most-correlated bottoms shows this isn't necessary a bad thing, and the inverse hasn't been a good thing.
Treasury yields are breaking out across the curve
Treasury yields across the curve are breaking out to new highs. A model that measures a surge in yield breakouts triggered a new alert on Monday. After similar signals, stocks, commodities, and gold struggled while yields continued higher.
Surging real yields and the impact on assets
The real rate on 10-year Treasuries - the nominal rate minus expected inflation - has broken out to a multi-year high and kept rising. Other breakouts were a modest headwind for stocks, while defensive sectors held up best. Gold, and gold mining stocks, tended to have among the worst returns.
A reason for caution in silver
Silver has been trending lower in 2022. Seasonality is entering an unfavorable period. While a rebound rally is always possible, it is typically best to go with the trend or stand aside completely when price and seasonality agree.