Key levels for bear views

At Tricio we look at charts in order to gauge investor sentiment and behaviour.

Investors are living in interesting times. This can be good or bad of course, but this is also a Chinese curse which needs to be kept in mind.

US and other major equity market indices made new all-time highs last week and kicked the year off to a solid start. The actions by US Pres. Trump in Venezuela, his threats to other countries and regimes and warnings of his willingness to use any means necessary to secure Greenland for the US were all taken as ‘ignore the bombastic stuff, focus on what actually happens’ by investors. The markets learned from the first Trump term that investors may get headaches at times in trying to deal with his pronouncements, but they took the view  last year that the TACO trade (Trump Always Chickens Out) is the best way to deal with his policy changes.

Then the DoJ investigation into Fed Chair Powell kicked into higher gear on Friday as they apparently served the Fed with grand jury subpoenas. The Fed Chair took the unprecedented step of publicly calling out the investigation as punishment for failing to lower rates fast enough to please the President, or coercion from the White House to lower rates or face the consequences that others who have angered the President have faced. Hopefully calmer heads will prevail and this will be a tempest in a tea cup moment for markets. However, there is a risk that after another year of Trump twists, actions may indeed have consequences and that investor sentiment may shift.

From a chart perspective we often look at trends and then look at levels that would suggest that the trend is changing. Whether that change in trend is only a corrective pullback or a reversal is difficult to gauge, but being aware of the chart levels to watch can be useful.

The chart below is the US 10-yr. note yield (weekly, with 13 and 50-week moving averages). Watch the 4.2% area as a ‘sticky’ area for bond yields, with the 4.27% level (50-week ma) important just above this. A break of these would leave 4.7% (falling line) in the sights. If the latter gives way (bond sellers on the back of concerns that a Trump controlled Fed would let inflation run hot) then 5% would be in the sights as the 2023 high zone already seen in this cycle.

The monthly long-term chart of the 10-yr. note yield below shows the risk levels above the 5% area with 5.20%/5.30% key. This area is the 1994 low and the 2006/2007 high area for bond yields. If cleared then the focus would be on 8% yields (top purple line). This was the peak in the 1994 bond bear market and would be a big level to break. We are not looking for this, but the risk is that if the US pursues policies that on balance are bad for bond holders (bigger deficits and letting inflation run higher) then bond holders may trim positions in US paper accordingly.

One of the bigger risks for our ‘neutral’ allocation to large-cap US shares is that very high valuations expose investors more to the risk that if interest rates rise, then high valuations may get squeezed. The S&P 500 (monthly chart below, semi-log) made new all-time highs last week and could make new all-time highs over the coming days - momentum can be tough to shift. Technically though this makes the December 6,720 low important. A break of this, especially if January closes below this low, would be a key reversal. We last saw this pattern in January 2022, which turned into a fall of over -20% in the pullback that year.

Further support to watch would be the November 6,520 low and then the 6,150/6,120 highs from early 2024. The 5-yr. moving average near 4,930 is key ahead of the April 2025 4,835 low, with the bottom of the rising channel near 4,100 important below these.

For now, hoping for current geopolitical events and the DoJ moves on the Fed to turn out to be more ‘huff and puff’ from the President in order to get a better negotiating position, than actual pre-cursors for more action. If investors turn away from the idea that this is another ‘TACO’ trade moment though, watch the bond market as this may be an early indication of ‘smart money’ turning away from US markets.

Gerry Celaya, Chief Strategist