You and I have been talking about the bond market for at least three months. More specifically, we’ve been talking about the fact that the bond market can’t get out of its rut.
Last week’s rhetoric from the Fed is putting the bond market at risk of falling deeper into a bear market trend. That wouldn’t be good for stocks.
Since the beginning of the year, the 20+ year Treasury Bonds (TLT) have been trying to break their long-term bearish trend to no avail.
We’ve seen the TLT shares test their 20-month moving average twice and fail. Now we’re seeing the ETF move towards making its lows for the year as the technical trends have all fortified the bears.
This is important for a few reasons. The most important is represented by one word: Liquidity.
The bond market’s health is one of the best barometers of the market and economy’s liquidity. As you know, the market and our economy are run on exactly that, liquidity.
A bear market in bonds starts to tighten that liquidity, pressuring the market from the inside out.
The recent fluttering by the Fed is now beginning to put more pressure on bond prices as the bond market reads Jerome Powell’s moves as bearish for the market.
We’ve seen a bearish pattern of lower highs and lower lows since the beginning of the year.
That continued pressure is putting the TLT shares on a course to break through $90 during the next few weeks.
That $90 represents what I refer to as a “trigger price.”
A break below this trigger price will invoke a round of long-term selling pressure in the bond market. The last selling surge like this happened in July and August 2023. That’s a continuation on our theme from last week, the similarities of July 2023 to now.
That flush of the liquidity markets could be more permanent with a hotter-than-expected CPI or PPI report as interest rates will surely head higher.
Bottom Line
I’ve said it before and I’m saying it again… follow the bond market, it’s the smartest money in the room.
Bond traders are starting to paint the picture of a more troubling second half of the year, despite economist and analyst’s calls for a strong economy and market.
Failure of the $90 level on the TLT should be considered a trigger for a four-to-six week correction in stocks as the stock market responds to the diminishing liquidity forecasts from the bond market.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.