Sell in May and go away? A chart pack.
Rates, dollar, stocks, bitcoin, and oil price study. An overdue update of a core component in The Bitcoin Layer's framework.
Dear readers,
Today, we take a pause from our cycle approach to focus strictly on prices. Prices tell a story, so let’s examine what markets are telling us. From our vantage point, it’s time for caution. I took a fresh look at all of the weekly candles to craft a story heading into next week’s FOMC meeting and next month’s dogfight over the debt ceiling—using only the pictorial representation of buyers and sellers going at it in the market. We end with a grand takeaway.
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Today’s charts
2s
10s
Dollar index
Crude oil
Gold
S&P 500
Bitcoin
2-year US Treasury yield
Takeaways:
After an extreme violation of expectations of a sustained 5% Federal Funds rate after a banking crisis in March, 2s are looking for their new home. What happened in March, with yields falling from above 5% to the mid 3% range in three weeks, was the biggest story of the year—higher policy rates are entirely unsustainable. No matter how much anybody prays for “higher for longer,” our baseline expectation is that the Fed’s terminal rate, whether slightly below or above 5%, will not last for anywhere close to a year. In fact, cuts are the baseline expectation of us and Treasury investors broadly. When the cuts happen is less important to rates observers than the fact they are coming. The yield on 2s tells this to us very clearly—now, even 4% policy rates are being faded.
Zooming in, the countermove from March mid-3% to above 4.25% last week was purely a countermove. Now, the stage is set for buyers to show how eager they are to own 4% yields. The appetite seems to be there, and strong buying this week on a Fed blackout is a sign of fearlessness from Treasury bulls.
I still see this 4.04% as a very important swing level— call it my recession and cuts line. If 2s settle in above that level, the market believes recession and cuts are off. Below it, things are going to deteriorate and buyers will push the yield down to 3% or lower this year. This is where I stand, a marked Treasury bull as prices have shown us that lower yields are the path of least resistance.
10-year US Treasury yield
Takeaways:
Yields on longer-term Treasuries were almost at 0% after the great pandemic panic of 2020. Zero. The normalization of the past two years ran into a harsh reality late last year—Treasuries are still the only way to avoid risk throughout the dollar system. All asset prices fell in 2022, but that can only last so long. We now are seeing shifting correlations, with yields and stocks falling together during small bouts of 2023 volatility. Treasury bulls have been unleashed, and they are setting the tone on recession.
Imagine a horse running at top speed. Now imagine a stampede. This was the selling pressure on Treasuries during 2022 as inflation ripped through the global economy. Now imagine that a few horses stopped and turned around last October, and by March, the entire stampede was heading in the opposite direction. The Fed might not be watching the obvious market action as closely as it’s watching backwards-looking economic data, but we are not so easily fooled. With 10s challenging 3% on any next hiccup in the banking sector, it is obvious who is in control of this market.
We see 2.5% as an important level that will surprise some in its gravitational pull. From a technical perspective, there isn’t much separating today’s level from this immensely bullish target—the last move through this range, on the way up, occurred during Powell’s “forceful” rhetoric stage.