Control Panel: Rising bond yields & "Death Crosses"

" What Is a Death Cross?

The “death cross” is a market chart pattern reflecting recent price weakness. It refers to the drop of a short-term moving average—meaning the average of recent closing prices for a stock, stock index, commodity or cryptocurrency over a set period of time—below a longer-term moving average. The most closely watched stock-market moving averages are the 50-day and the 200-day.

Despite its ominous name, the death cross is not a market milestone worth dreading. Market history suggests it tends to precede a near-term rebound with above-average returns… Intuitively, the death cross has tended to provide a more useful bearish market timing signal when occurring after market losses of 20% or more, because downward momentum in weak markets can indicate deteriorating fundamentals. But its historical track record makes clear the death cross is a coincident indicator of market weakness rather than a leading one."

The death crosses in the stock market indexes and internals happened about a month ago, in mid-September 2022. The VIX had a kind of reverse death cross where volatility is increasing more recently, not a good sign.

Oil prices are rising which could lead to higher inflation during the winter. But natgas is falling.

Treasury prices are rising rapidly at all durations. The 10YT yields 4.24% which it hasn’t done since 2007.

The 30 year mortgage is almost 7%, the highest since 2002 and rising fast. Housing affordability is dropping. The Case-Schiller housing index has peaked but the data hasn’t caught up to falling house prices or the drop in housing starts. Since housing is a large part of the economy, the drop in home building and sales will slow the economy as the Fed intends.

The Federal Reserve will probably raise the fed funds rate 0.75% in November and 0.50% in December…and predicts smaller rises in early 2023. The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity is firmly negative, a harbinger of recession.

The Fear & Greed Index is overall neutral although the stock market indicators are in Extreme Fear. The trade is neutral and maybe even a little risk-on since junk bonds and stocks are trading in a range against the 10 year Treasury bond (whose price is falling as its yield rises).

This is a time to keep bond durations short to avoid being caught with falling long-term bond prices … a choice which isn’t available to heavily indebted companies or to insurance and pension funds.

National Financial Conditions are steady. The Atlanta Fed’s GDPNow estimate for real GDP growth in 2Q22 is not recessionary. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 2.9 percent on October 19, up from 2.8 percent on October 14. After recent releases from the Federal Reserve Board of Governors and the US Census Bureau, the nowcast of third-quarter real gross private domestic investment growth increased from -3.6 percent to -3.3 percent.

The Conference Board Leading Economic Index® (LEI)for the U.S. decreased by 0.4 percent in September 2022 to 115.9 (2016=100), after remaining unchanged in August. The LEI is down 2.8 percent over the six-month period between March and September 2022, a reversal from its 1.4 percent growth over the previous six months. That is slightly worse than the “mini-recession” of 2016 but very small compared with the recessions of 2009 and 2020. If it doesn’t get worse, this would count as a soft landing.

There is nothing in these indicators to discourage the Fed from raising interest rates. No matter how you look at it, inflation is much too high and still accelerating (except for a tiny monthly drop which may be noise).

Financial stress is comparable to 2016. Corporate bond yields are rising fast for BBB (investment-grade) and junk bonds. It will take a while for zombie companies to default but they will if this continues. The Fed won’t come to their rescue this time. There’s no emergency and Congress won’t change the Fed’s mandate the way they did in 2020.

The METAR for next week is autumnal. Like last week, there may be some Indian summer days. But all the trends lead to winter.

Wendy

https://www.chicagofed.org/publications/nfci/index

13 Likes

And yet, the excuse for the market’s rise last week was chatter that the Fed’s interest rate increases will be “smaller than expected”. What will stampede the lemmings next week?

Steve

4 Likes

Seeing they already used “smaller than expected” last week, I guess they could use “bigger than expected” or “better than expected” or “exceeded expectations”.

Anything to move those lazy lemmings!!
'38Packard

Hi Wendy.
The indices (SP500, Naz, DJIA) 50MA crossed below the 200MA back in Feb and March.

I think the gandleglance charts are the confusing factor?
They show blue (20) and red (50) MA lines.
Scroll to the bottom of the screen for the legend.

I have to constantly remind myself that the MAs are 20/50, when looking at the candleglance charts.

IMO this does not change the Control Panel conclusions.

I would add that the Golden and Death Crosses are very lagging indicators.
For those who are trying to time a Market TOP, or (currently) the BOTTOM, waiting for the Golden Cross, will miss the Bottom.
The crossing of the 20 over the 50 as used in the candleglance charts will indicate the “reversal” sooner than the 50 over the 200. But theres a lot more volatilty in the 20/50.

Wendy has noted previously that a high confidence indicator for the end of the Bear will be when the Fed changes course and lowers the interest rate - AND, that this will occur a quarter or two after the market bottom.

Will the 50/200 Golden Cross coincide with the Fed reversal?

:+1: thanks for the Control Panel posts!
:grinning:
ralph

While the official Golden/Death Cross is the 50/200, many TA people use different MAs for the Golden/Death Cross.

I’ve followed TA for years, due to following trenchrat back in the day.
It’s JUST A TOOL.
I personally think FA is FIRST, then TA as a “helper”.

2 Likes

Nobody knows yet whether this situation will shape up to resemble the 1970s (when inflation was rising intractably until Paul Volcker induced the terrible 1980-82 recession with very high interest rates) or the more recent recessions.

The stock market fell between 1968 and 1982 with numerous head-fake recoveries that failed. (Including the nasty bear market of 1973-74 caused by the OPEC oil embargo.) Buying stocks during the 1970s was gut-wrenching since they seesawed up and down but didn’t see a true bottom until 1982.

Waiting for a time after a “bottom” in the current situation is insurance against a similar situation. The Fed might think that inflation has been conquered, only to have it raise its ugly head again. (As happened in the 1970s with Fed Chair Burns.) Then they would be forced to raise rates again, rinse and repeat.

The mungofitch 99 day rule forces the investor to wait during 99 days of new highs to buy into the market. That reduces the risk of buying into a head-fake.

If a new bull market truly has legs it will last for years. Waiting to see if it continues reliably won’t sacrifice much for the long-term investor. I’m not a speculator with FOMO so missing the initial excitement doesn’t bother me.

Wendy

1 Like

I’m trying to wrap my head around his triggers algorithmically. Let’s see if I am correct.

Sell signal: if the closing price today is lower than it has been at any point the prior 98 days, then sell. On what day did this trigger?

Buy signal: if the closing price today is higher than it has been at any point the prior 98 days, then buy.

I don’t know what his bottom detector is however. But I believe it fired within the last 30 days.

I could be wrong but I think you sell the market if there have been no new highs for 99 days. His bottom signal is different. It has something to new with the ratio of new lows to new highs combined with a measure of trading volume. His bottom signal triggered a couple of weeks ago with the markets moving largely sideways since then.

1 Like

Mungofitch has several different ways to analyze the stock market (see the Mechanical Investing Board). The “mungofitch 99 day rule” is only one of these. The buy signal isn’t a bottom trigger. It’s to buy into the stock market when new highs have been made for 99 trading days. (I assume this doesn’t count the usual noise.)

Wendy

The UK has a new PM, apparently. And he’s from Goldman! The City is probably comforted that they will be well cared for.

Steve

2 Likes

I think that means, then, that the price each of the prior 98 days is lower than it was on the 99th day ago. And any bouncing around in-between is not material. After all, there is NO WAY a stock goes down 99 days in a row without any short and small bursts up.

“No new highs.” “New highs”. These are somewhat vague terms. I’m looking more mathematically. No new highs, over what time frame? No new 52 week highs? Or, as I state above, the last N trading days all closed lower than the N+1 day ago (which is what I suspect).

But what happens if a stock is $100 98 days ago, has dropped all the way to $80 yesterday, then today goes up to $82. That $82 is not a “new high”, correct?

1 Like

Here’s a chart Mungofitch provided many moons ago to visually demonstrate the rule. The bottom blue line and the dashed blue line are irrelevant. It is the top line that is important. When that top blue line reverses direction and goes down after a series of up ticks, that’s the sell signal. When it again reverses and goes up after a series of down ticks, that is the buy signal.

Note that this is not an overall market signal, it is just a signal used to move in and out of an S&P 500 index fund. His major bottom detector is a different signal for a different purpose.

That tick down in May 2022 is a sell signal. There is no buy signal in the chart as presented. But if you adjust the range to include June/July 2020, you will see a sell signal followed by a buy signal. This particular one is a whipsaw, which this set of signals occasionally does. But it at least demonstrates what a buy signal looks like.

–Peter

6 Likes

Aha! Thanks. It is what I expected. Another way to look at it is, if the 99-day-high goes down that is the sell signal.

1 Like