Bonds Tell the Story: Rates Going Lower, Equity Volatility Ahead, New Crisis Looming

I first posted on May 4th that the VIX was looking for an early summer breakout, with a target date of June 15th. Also, that this volatility could be tied to a new round of unrest in the Middle East. The VIX would breakout a week later and rallied from May 10th-12th accompanied by unrest in Israel, an assault on Israel from Gaza at the hands of Hamas. It was one of the most severe and significant air assaults on Israel in recent years.

Since then, the volatility index has continued to base and is poised for a larger, more significant breakout.

Geopolitically, a key element occurred in June with remarkable silence from both Christians and news media. Israeli Prime Minister Benjamin Netanyahu was defeated by Naftali Bennett and replaced as the leader of Israel. I suggested in my June 14th post that Netanyahu’s term as leader could have market significance.

Benjamin Netanyahu took over as Israeli PM in March of 2009, the bottom of the 2007–2008 Financial Crisis bear market and the beginning of a bull market that has lasted to today. Netanyahu left office on June 13th. Recent changes in Israeli leadership could signal broader changes for global order and the markets.

Throughout the month of July the VIX has continued to base in a pattern that typically leads to explosive breakout. The weekly RSI is set to breakout and with the S&P putting in 6 green months in a row (Feb through July), and a monthly RSI approaching 80, it all suggests significant risk off in the months ahead.

Bonds are sending the signal to be ready for future weakness.

TLT, an instrument that trades inverse to the 20 year Treasury bond, is set to Golden Cross. Price continues to hold the 200 Day Moving Average. With TLT completing a Wyckoff pattern in previous months everything points to a bond rally with investors seeking protection.

Likewise, the US10YR has had trouble reclaiming the 200 Day Moving Average and is setting up for a Death Cross.

Both point to lower rates and combined with the VIX, it all points to market volatility on the horizon. The VIX weekly RSI is set to breakout from consolidation all the way back to the March 2020 highs.

I should also note that the DXY, the USD Index, put in a Golden Cross on July 26th. The last time that happened was February 21, 2020, at the top of the market before the February-March 2020 market crash.

It is all about what the bond market is doing right now and the direction rates are headed. Bond yields foretell the future direction of equity markets. In the weeks and months ahead, forget the news narrative they come up with. Dropping yield is a sign that stimulus has run its course.

Where April 14th marked the top in crypto, the day of the Coinbase direct listing, we have been basing in equity volatility since then while TLT finished Wyckoff distribution.

But why are these boom and bust cycles happening and is the Fed helping or hurting?

Contrary to popular belief, the Fed is not the hero but rather the culprit. The US10YR has been steadily declining since 1981. Any talk of higher rates is a fool’s errand. In a world where growth is all driven by debt, yields must steadily decline or it all goes bust. The next market crash will likely push the 10YR near 0. A strong bond market is required for fixed mortgage rates. The Fed for ARMs. Negative rates are coming.

Everything Jerome Powell said July 28th was typical Fedspeak meant to appease the American people and direct them away from obvious: the Fed can not raise rates. It has nothing to do with their mandate of price stability and maximum sustainable employment. A debt based system at this stage is trapped with low to negative rates. Boom and bust cycles will get worse and more emergency monetary policy will be needed down the road.

With the Robinhood IPO launching today, July 29th, these type of events typically mark the top in markets as retail investors rush in to support the cultural zeitgeist. The same happened with Coinbase on April 14, 2021 which marked, to the day, the top in Bitcoin and cryptocurrency.

All to say, I have to agree with David Erickson of Barclays regarding the Robinhood IPO.

“There are a lot of red flags,” said David Erickson, who used to run equity underwriting at Barclays and now teaches at Wharton. “This is as far from a ‘must own’ for most big institutional investors as you can get.”

Though I am not an institutional investor there are red flags all over this market. I would add that it is not just the Robinhood IPO but the entire market that is showing signs of underlying weakness that will eventually find its way into the credit markets.

But what concerns me the most, and what people are missing completely, is that money is only a medium of exchange. It doesn’t matter how much you have, if it isn’t on the shelves to buy both the rich and poor will be at the mercy of the government. Perhaps the COVID stimulus kept us busy and moved our eyes off the ball long enough to provide a distraction so to help us forget that the entire system is broken.

What people need to answer is not “how rich can I become in our failed system” but, should I be making an exit from the system and prepare to go at it alone without future government assistance.

*Disclaimer: Nothing mentioned here is investment advice. This is market observance and should be taken as opinion and not investment advice.




Matt Cote is a Christian author. He and his wife Hannah live in central Texas with their two sons, Elijah and Luke.

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Matt Cote

Matt Cote

Matt Cote is a Christian author. He and his wife Hannah live in central Texas with their two sons, Elijah and Luke.

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