Bond Market Is Screaming. Will Equities Listen?
RLT Newsletter
On May 7th I wrote a newsletter called “Patience” where I suggested SPY would likely begin some kind of correction in the $730 to $740 range and that patiently waiting for better entries was the smart move. As it turns out, the market made that second point even harder by blasting all the way to $750 without even pretending to slow down.
Then on May 9th in “Copy Paste,” I detailed the historical instances of these extreme vertical momentum runs and what tends to happen after RSI gets this overheated. The short answer was simple: historically, a decent pullback usually follows within the next couple of weeks.
On May 11th in “SPY Hits Huge Fibonacci Level,” I outlined how SPY was pushing directly into a massive Fibonacci extension level that has historically marked meaningful turning points nearly every single time. If you have not read that one yet it is honestly still worth going back to, because it dives into just how powerful these Golden Ratio Fibonacci extensions can actually be. Both SPY and QQQ have once again stalled almost perfectly at their major Fib extension zones that I outlined in this piece.
Then on May 13th in “Unprecedented Extension,” I looked at the absolutely historic momentum run QQQ has been on and how it officially set the record for the longest streak in history without touching the 10-EMA. I also pointed out something important: once QQQ gets this extended from the 10-EMA, price historically does not simply bounce cleanly on the first touch. More often than not it slices right through the 10-EMA as price mean reverts back toward the 20 or even the 50-day moving average, often surprisingly quickly.
And finally on May 14th in “Everyone Is Expecting a Pullback,” I reviewed every instance since 2010 where SPY’s daily RSI reached 77. Historically that has almost always preceded a decent pullback shortly afterward.
Five newsletters in a row warning that this market is likely nearing at least some kind of top or meaningful pause and urging caution for overly aggressive bulls.
Where Things Stand Right Now
To be fair, the pullback technically has not happened yet. We currently have one bearish candle and it did not even close below the prior two days of price action. Could Monday simply ramp right back higher? Absolutely. Anything is possible in a market this irrationally strong.
But with how extended price currently is, it honestly would not take much of a news catalyst to trigger a sharper drop. Everyone seems to be sitting on edge waiting for some kind of excuse to lock in gains.
Friday also gave us the first real warning signs that equities may finally be getting a little nervous about the bond market. The 20-year Treasury yield pushed above 5% on Friday while the 2-year yield is now potentially forming an inverted head-and-shoulders breakout above 4%.
Ironically, what many traders were hoping would turn into rate cuts under someone like Kevin Warsh may instead end up being a rate hike environment if inflation starts heating back up again. If oil breaks higher and inflation reaccelerates while liquidity tightens, that is not exactly the backdrop you would normally associate with a stock market that just keeps ripping higher.
That is really where the bulls and bears are splitting right now.
The bull thesis, which has been the correct thesis ever since the 2022 lows, says AI is such a transformational force that stocks can continue higher even against a shaky macro backdrop because of the systemic productivity changes it will create.
The bear thesis, which has been wrong for years, argues that the macro environment eventually catches up with the market. Inflation, weakening labor conditions, unsustainable AI funding models, and tightening liquidity eventually pop the bubble and trigger the next major bear market.
If you have followed me for a while, you probably know I sit somewhere in the middle of those two extremes. Price action is ultimately my guide.
SPY Daily Chart
The Levels That Actually Matter
While I absolutely think it would matter if DXY breaks out to new highs while TLT breaks down to new lows, I do not directly trade currencies or bonds. So if equities decide to remain irrational a little longer and keep delaying a correction, I will simply continue monitoring key levels on SPY, QQQ, and the Trillion Dollar Titans.
From a bigger picture perspective, as long as the next dip ultimately holds the 100-day SMA, I still think the broader trend remains bullish into the summer. If we start decisively breaking below that level, things start becoming much more dicey.
That probably sounds a little crazy considering the 100-day SMA currently sits nearly 7% below Friday’s close on SPY. But then again, everyone thought SPY hitting $740 in May sounded insane back when we were sitting at $640 in April. Markets move incredibly fast in both directions, which is exactly why I always try to map out key levels well in advance rather than emotionally reacting in real time.
For more immediate support, I think the gap fill near $725 on SPY will fill once a real pullback begins. Whether or not that support level actually holds will tell us a lot about how serious this correction may ultimately become.
If we simultaneously get bearish confirmations from the bond market, oil, and the dollar, I will become much more cautious buying dips.
The Dollar, Oil & Bonds
The DXY has massive resistance sitting right around $100. If it breaks above that level it is going to matter a lot, not just for Bitcoin but for risk assets broadly.
As I have talked about many times before, DXY and Bitcoin have a pretty reliable inverse correlation. When DXY bottoms, BTC tends to top, and when BTC tops, DXY tends to bottom. Right now DXY looks a lot more like it is trying to put in a bottom than a top, which is one of several reasons I still think BTC could make a new lower low before this bear market is fully resolved. If DXY stays below $100 and eventually breaks down again from here, I can get firmly on board with the idea that BTC has already put in a longer term low and that our current push higher is not just an extended bear flag. But if the dollar starts breaking out above $100, it becomes very hard to imagine BTC holding up well under those conditions.
DXY 3 Day Chart
TLT has already started flashing warning signs after breaking below its key $85 support level. That warning signal is now active. If TLT starts making fresh lows below $83 and especially below the 2023 lows near $82, things could get pretty wild. It becomes very difficult to imagine an endlessly euphoric bull market continuing under those conditions.
TLT Daily Chart
With oil, the first major level to watch is a breakout above the trendline that has trapped crude inside this large triangle pattern since March. The real danger zone comes if oil breaks above $120 and starts making new highs. That would likely create genuine fear across financial markets, especially since most participants currently expect crude to trend lower over time.
Crude Oil 3 Day Chart
My Current Positioning
Taking all of this together, I still think we are getting very close to a meaningful pullback and I am positioning accordingly with a fairly large cash position.
I will continue looking to buy dips in the strongest names as opportunities present themselves and will keep updating here as that happens. But I will also be watching TLT, oil, and DXY very closely. If all three start breaking the key levels discussed above, I will become much less aggressive buying dips and instead wait for either lower prices or stronger confirmation that equities are actually stabilizing and ready to move higher again.
Thanks so much for your newsletters.
It always includes valuable insights that help me get a better understanding about the market.
Excellent as always.