August 27, 2024 • 21 mins
Important levels for NVDA, S&P 500, rates and the US Dollar along with correlations for stocks/bonds/USD.
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Episode Transcript
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Speaker 1 (00:00):
Now here's your chare for my wealth guy, Chris Klein. Oh, well,
Jonathan's not with me today unfortunately, so you just get
to see me. And so rather than look at me,
I'm going to share my screens with you and just
kind of give you the nuts and bolts of what
we're seeing heading into tomorrow. The flows of markets are
(00:21):
actually really, really fairly positive, even going into an event
that apparently is as earth shattering and important as the
Navidia earnings report, which comes out tomorrow after the close today,
of course, is Tuesday, August the twenty seventh. It's about
an hour after US markets have closed, and nothing crazy
(00:43):
or earth shattering. Not a lot of volume today, which
is pretty consistent with event volatility or the potential of
event volatility, like an earnings report from a massively big
company that takes up a lot of space indexes. So
let me just share my screens real quick and kind
(01:04):
of give you a picture of what I'm looking at
that hopefully you'll be able to see this and it
will make sense, and hopefully my technology won't be terrible
here any rate. This is the S and P five.
(01:25):
Excuse me, this is Navidia, and what I'm looking at
in Navidia right now is the fact that it is
bullish trend. You hear me talk about trend a lot.
That's nothing more than the rate of change of price,
volume and volatility over a time series of three months
or more. And that's what this line is, and that
gives us a good indication that institutions are still holding
on to an upside possibility, turning into more of a
(01:50):
probability the longer it maintains itself above that. And what
I would really like to see is this white line,
which is trade trades just we defined as the rate
of change of price, volume and volatility over a period
of less than a month, and so that's that momentum line.
Once that pops up above that trend, it becomes a
very very strong indicator that more likely than not, those
(02:12):
levels are going to hold. So these blue lines are
the intra day trading levels that are a function of
taking a calculus of volatility and volume and price and
just everything and pulling it all together and then looking
at the flows of the market and gives us an
indication of what the probability is that could occur for
(02:33):
price movements. So these two blue lines become I guess
more of a possibility than a probability, right, And anytime
it's closer to the lower end of the probable range
to the compared to the higher end of the probable range,
which you see up here, it just tells us that
more likely than not, it's creating a buying opportunity. What's
(02:54):
going to happen after tomorrow's close and then into Thursday's trading.
I have no idea. I'm not privy to the information
that Navidia might be leaking out to some of their
biggest hedge funds or biggest partners or people in that sphere.
I really have no idea. The technicals are suggesting two things. One,
it's above trade and trend, so that's bullish. It's signaling
(03:17):
higher highs and higher lows, so that's bullish. However, the
event itself could bring about a move that could take
it all the way down into this area roughly one, say,
one to eleven for Navidia. One eleven for Navidia is
still okay. That's still in the range of trend, and
it would still remain bullish if it stayed in that
(03:38):
range and then popped higher. And that's kind of been
what they've been doing historically with their earnings reports. They
go through maybe a little bit of a sell off.
The day that they are ready to announce, the markets close,
Navidia ends up slightly down. They blow away the data
and blow away the numbers, and then the next day
the stock goes straight up again. That's all it's been.
(04:00):
Why is that important? It represents close to seven percent
of the S and P five hundred at this point,
or close to it. I'd have to update some of
that data to get exact, but nevertheless, just know that
it's a big portion of the S and P five
hundred in terms of how it can move the SMP.
And so the S and P five hundred right now
is also in an interesting spot in that it is
(04:22):
getting not overbought yet for it to be overbought, i'd
need to see some green bars like this right, And
that doesn't always mean that it's going to go down.
As you can see here, this is price. It was
overbought and it didn't come down right. And so just
because it's it's getting us into a condition that could
(04:43):
be close to overbought, does not mean that it's going
to drop. Remember we're still in a bull market. Bull
market flows are still happening from CTAs, volatility control funds,
hedge funds, things of that nature, and as that money
comes in, it buoyes the index is like this. And
so if we got to pull back tomorrow to fifty
(05:03):
five to fifty five in the S and P, definitely
a spot where we would more likely than not maybe
add just a little bit of leverage to our more
aggressive accounts. And if it came all the way down
into this level it's just fifty five to ten, we'd
seriously consider about adding it up. And if it came
all the way down to trend here at fifty four
to fifty four, I would definitely add it back to
(05:25):
those more aggressive accounts. Are normal, non leveraged, what we'd
call moderately to moderate to moderately conservative portfolios, I guess
are pretty fully allocated right now to US equities and
international equities. Just as we continue to move in and
through an economic cycle where two things are happening that
(05:48):
I think are very very very important. Number one, monetary policy,
and this is just a function of what we call
M two. So you should be able to see this
great big screen. M two is just showing what the
money supply is doing, and if the money supply is increasing,
it makes it really really hard for the equity market
to get beat up that bad. Twenty twenty two was
(06:12):
a tough year, of course for markets, But look what
was happening to money supply. It was declining, it was degrading.
They were taking money out of the system, if you will, right,
that's not happening to that extent anymore. It's been accelerating,
as you can see there. The other thing that's incredibly
important is something called VIX term structure. This is for volatility.
(06:32):
Anytime we have VX one below VX two, it just
simply means that this is the VIX one contract planning
to expire currently ready to expire September seventeenth. VX two
contract expiration is October fifteenth. This is a normal relationship.
VX one is lower than VX two. Now why is
(06:53):
that important, Well, anytime vx one gets above VX two,
that's what's called backwardation. Backradation in the futures contracts and
of VIX is indicating there's a real problem somewhere that
more likely than not, is going to result in or
manifest in lower prices for the stock market. In fact,
(07:15):
if I were to go back and show and I'm
not going to do this because I would bore you
to tears, but if I would go back and show
you the day that the VIX term structure went into backradation.
In other words, VIX one went above VIX two, not
like what you're seeing now. VIX one is below VIX two.
But if it were way up in here above VIX two.
(07:36):
If I went back and showed you every single instance
that VX one was higher than VX two, you would
see a situation where the stock market ended up going
through some type of draw down or in some cases
even a full on drop, bear market or collapse every time.
So watching VX one in VX two for us is
very important. This is what we call conentangle. Contango's normal
(08:00):
raidation is backward. It's not normal. So when we see
that happen, we start to consider backing up and protecting
more than not. That becomes even more valuable and even
more important if we're in a macro cycle that is
more risk off than risk gone, and again even more
(08:21):
and more important that if we are already in a
trending bear market so none of those things are in
play at this time at least yet it changes every day,
so we watch it every day throughout the day just
to try and give us an indication of where risks
might be creeping in. And this is very steep and
so nothing is pointing at least to us as ooh,
(08:44):
that's a serious problem. We should watch out for that.
So those are the things that we're looking at right now.
For the S and P five hundred, we're looking at
this first level of fifty five to fifty five, the
next level of fifty five to ten, in the level
below that at fifty four fifty four. Those would all
be three decent spots to consider increasing the degree of
(09:05):
risk that we are willing to take. But even right now,
the flows that are coming into US markets, especially via
the options market, are showing to be very very strong,
and so therefore we're pretty well allocated bonds. I'm going
to show you this just real quickly. This is the
twenty year yield, this is the ten year yield, and
(09:29):
what it's showing me is what I've been talking about
in my morning emails. Both of those longer dated yields
are showing bearish trend, which just means that it is
more likely than not that we see a longer term
drop in interest rates or longer term cycling down of
interest rates as we kind of progress through this current
(09:53):
economic cycle. And you can see that on a longer
time scale. This is weekly, so each one of these
bars represents one week. You can see it broke through
this longer dated trend level. Again, price volume and volatility
rate of change over a period of three years or more,
it's much much different in terms of that kind of scenario. However,
(10:14):
this thing here, in this thing here tells me that
it would not surprise me to see price in this
case yield go from the current three point eight three
percent up to this level here, which is four point
one eight. Now am I expecting it to happen, No,
but the possibility is definitely there based on the way
that these other indicators are playing out. SAME's true for
(10:36):
the twenty year treasury, and so you get some backing
and filling. It gets them up and down, and it
creates an environment with yields where again, the economic cycle
is such right now where it is more probable than
not that we continue to see a decline in interest
rates not an increase, but we can have these moments
(10:57):
where interest rates on the longer side of the yield
curve go up a little bit, and it's just that
typical backing and filling that you get within a cycle
where bonds are bullish, interest rates dropping makes bonds bullish,
and when bonds are bullish, well, then that makes yields parish.
So my expectation is over the next several months, we're
(11:19):
going to continue to see a couple of things. Number One,
we're going to see the Fed cut rates more likely
than not in September. How much don't know. Some are
calling for twenty five basis points. We've seen markets planning
or expecting up to fifty basis points. Who knows, right,
it's anybody's gas Withinside that, though, we continue to be
(11:39):
within a bullish confine of US equity markets on the
S and P. Primarily, it is a much stronger index
right now than some of the other indexes, and a
lot of it has to do just with names that
would be more cyclical in nature or consumer oriented in nature.
You think of names like maybe Walmart or Target, things
(12:04):
of that nature, right which you know their sales and
earnings and numbers have been really pretty strong. So all
that is looking very very normal. The correlation grid and
I won't show you this because it'll make you google
the eye, but the correlation grid's valuable in that. What
we want to look for our correlations that start to shift.
(12:27):
And when I say correlations, I'm talking about stocks to bonds,
stocks to currency, stocks to yields, stocks to gold, so
on and so forth, right and then vice versa, And
right now they're very strongly positive pretty well across the board.
In other words, there's a point eighty one correlation with
the S and P five hundred in gold, there's a
(12:49):
point nine to two correlation with the S and P
five hundred and the Russell two thousand, a little bit
higher with the Nasdaq one hundred, a point seven corelation
with bonds longer dated bonds. Proxy for that is simple
TLT if you're interested in looking it up. But when
you have these correlations that are running the same, the
(13:10):
next thing I want to look at is the US
dollar and ask myself is it positively correlated as well?
And it's not. Right now, the correlation with the US
dollar across all those elements or all those indexes or
investments that I just mentioned are negatively correlated anywhere from
point seven all the way to point ninety six. And
(13:30):
so when you have that kind of a correlation scenario,
the dollar movement becomes very, very important. And when you
have a negative correlation with the US dollar, what we
have to look for then is to ask ourselves, Okay,
is the US dollar bullish or bearish? Well, here's a
picture of the US dollar, and as you can see,
(13:51):
the US dollars bearish trend signaling lower highs and lower lows.
And so that's interesting. Now it is over sold. So
when you get an oversold condition within a bearish environment,
it can go one in two ways. You can get
a short pop up to the lowest range, which would
be right here at about one oh one seventy five.
This is DXY by the way, this is the US
dollar index, or it can crash. Now, a dollar crashing
(14:17):
from here would move both stocks and bonds higher by
a fair amount. And so I'm I'm not in either
camp right now because I'm not seeing an indication that,
oh goodness, we're in a flat out scenario where the
US dollar is just going to collapse. We're not seeing that,
And I don't think the US government wants that to happen.
(14:41):
And so, yes, there is some dare I say, manipulation
that goes on within the hallowed halls of the Fed
to the Treasury. Yeah, there's always a little bit of
monkey business in that environment. But nevertheless, what the US
dollar index is telling us is it's trading in a
bearish trend. Again, rate of change, price fund in volatility
for a period of time greater than three months, and
(15:04):
so it's bear'st trend. It's bearish trade. So the momentum
players are pushing down on the US dollar, not up,
and so as that happens, as long as we see
these negative correlations along with stocks and bonds, if the
dollar continues to go down, as an investment manager, I
really don't care. In fact, I would prefer that because
it creates a tailwind behind the US stocks and US
(15:28):
bonds scenario of which we are large owners of right now.
And so having a negative correlation with the US dollar
in those elements is okay from an investment standpoint. Is
it great to see the value of the US dollar
go down in terms of purchasing power? No, no it isn't.
(15:49):
But this is not abnormal for what you would get
at this part of the cycle in an environment where
the markets are expecting the Federal Reserve to cut interest rates,
or if they cut interest rates, they're just paying less
on the value of that dollar. So if a citizen
or a foreign country were to hold US dollars and
(16:10):
they cut what they were getting paid for holding those
US dollars, I eat interest, well, then all of a sudden,
the demand for those dollars might not be as much.
That's very simplified. There are a lot of other dynamics
that go into the supply and demand of US dollars. Yes,
there's an awful lot of emerging market debt that has
to be paid back in US dollars and they don't
(16:33):
have enough of them. So you know, there's that dynamic
that acts as a tail behind the US dollar versus
as a headwind. So am I in the camp that
the US dollar is just going to get collapsed on
go away and cause all of us to have a
crazy amount of hyperinflation. No, I'm not in that camp.
Am I in the camp where we continue to see
(16:55):
this slow march lower until it stops? Yes, how do
we know when it stops? Well, it'll stop when it stopped,
But the first indication will be that it will start
to move itself higher. It will recapture its trade level,
which is that again price volume and volatility rate of change.
Over a period of less than a month, the momentum
(17:17):
players will start to kick in buying US dollars. It
then moves into bullish trend and at that point the
decline in the US dollar would probably be over. When
is that going to happen? No idea. Year to date,
the US dollars down point eight percent over the last month,
it's down three point six percent. Over the last three months,
it's down three point nine percent. So as you can see,
(17:37):
it's just trending lower. And as long as those negative
correlations continue to stick in in place with the US
dollar to stocks and bonds, there's not a huge aspect
of negativity that at least on the surface or underneath
the surface from what we can see from volatility regimens
and things of that nature, that would cause the US
(17:58):
stock market to have all sorts of problems. One other
thing that I think is important to view, and I'll
share my screen for this last thing, and then I
will get out of your hair. Is junk bonds. Now,
junk bonds are well, they're what they sound like. They're
bonds that are that are floated to institutions or businesses
(18:22):
or companies that have less than stillar credit. And so
when that happens, these companies have to pay a much
much higher rate of interest to maintain those loans. And
in economic cycles where we see massive amounts of weakness,
we see high yield bonds really getting clipped and going
down not just a little, but a lot. And I'll
(18:45):
show you what I mean. I'm gonna show you a
weekly chart and I'm gonna back this up all the
way into twenty twenty two, the last time we had
a real massive US stock market drop, and look at
what happened to price of junk bonds. I mean, they
jump up. Bonds in twenty twenty two went from eighty
seven bucks a year all the way to its low
down to seventy bucks a year. Right. That's a big drop, right,
(19:09):
And that was telling us early, even if I backed
up into twenty twenty one, HIYU bonds were having a problem,
and so it was an early indication that hey, there's
a problem economically happening right now. Well, look at it now.
Jump bonds just keep kind of slowly marching themselves higher,
staying above trade again, rate of change, price folument volatility
(19:30):
less than a month, staying above trend. You know, whenever
you have those conditions in an asset class where it
just comes down, bumps off, a trade moves higher, bumps
off a trade moves higher, that's very bullish. It's a
bullish trend signaling higher highs. Right. And so when you
have those kinds of things happening inside something like a
high yeal bond that more highly correlates to stocks, it
(19:52):
moves along with the same kinds of economic conditions that
you might you know that you might be able to
deal with with stocks. You kind of put them together
and say, oh, look at it. It's uh yeah, that's
a thing. So not a problem in how yield bond land. Okay,
that's it. I don't want to borrow you anymore. I
just wanted to give you some basic things to consider
and think about or watch. I guess just know that
(20:16):
I'm watching it, and I watch it every day all
the time US markets are open. Jonathan does as well
along with me. He couldn't make today's podcast, but definitely.
We'll get him back in again here after Navidiot earnings
because I'm sure there'll be some fun things to talk
about with how the action and markets moved them. So
until then, if you have any questions or if you
want to chat, reach out to me Chris at carefromidwealth
(20:39):
dot com, shoot me an email which is again christ
carefromiwealth dot com, or shoot me give me a call
six zero eight three five four one seven. That's my
direct line. If you want to use toll free, you
can do that eight sixty six five ninety six ninety
eight eighty six. Okay, thanks so much. Hope everything's well,
Have an awesome day, God blessed. We'll see you some
(21:00):
God him by the grave
Now here's your chare for my wealth guy, Chris Klein. Oh, well,
Jonathan's not with me today unfortunately, so you just get
to see me. And so rather than look at me,
I'm going to share my screens with you and just
kind of give you the nuts and bolts of what
we're seeing heading into tomorrow. The flows of markets are
(00:21):
actually really, really fairly positive, even going into an event
that apparently is as earth shattering and important as the
Navidia earnings report, which comes out tomorrow after the close today,
of course, is Tuesday, August the twenty seventh. It's about
an hour after US markets have closed, and nothing crazy
(00:43):
or earth shattering. Not a lot of volume today, which
is pretty consistent with event volatility or the potential of
event volatility, like an earnings report from a massively big
company that takes up a lot of space indexes. So
let me just share my screens real quick and kind
(01:04):
of give you a picture of what I'm looking at
that hopefully you'll be able to see this and it
will make sense, and hopefully my technology won't be terrible
here any rate. This is the S and P five.
(01:25):
Excuse me, this is Navidia, and what I'm looking at
in Navidia right now is the fact that it is
bullish trend. You hear me talk about trend a lot.
That's nothing more than the rate of change of price,
volume and volatility over a time series of three months
or more. And that's what this line is, and that
gives us a good indication that institutions are still holding
on to an upside possibility, turning into more of a
(01:50):
probability the longer it maintains itself above that. And what
I would really like to see is this white line,
which is trade trades just we defined as the rate
of change of price, volume and volatility over a period
of less than a month, and so that's that momentum line.
Once that pops up above that trend, it becomes a
very very strong indicator that more likely than not, those
(02:12):
levels are going to hold. So these blue lines are
the intra day trading levels that are a function of
taking a calculus of volatility and volume and price and
just everything and pulling it all together and then looking
at the flows of the market and gives us an
indication of what the probability is that could occur for
(02:33):
price movements. So these two blue lines become I guess
more of a possibility than a probability, right, And anytime
it's closer to the lower end of the probable range
to the compared to the higher end of the probable range,
which you see up here, it just tells us that
more likely than not, it's creating a buying opportunity. What's
(02:54):
going to happen after tomorrow's close and then into Thursday's trading.
I have no idea. I'm not privy to the information
that Navidia might be leaking out to some of their
biggest hedge funds or biggest partners or people in that sphere.
I really have no idea. The technicals are suggesting two things. One,
it's above trade and trend, so that's bullish. It's signaling
(03:17):
higher highs and higher lows, so that's bullish. However, the
event itself could bring about a move that could take
it all the way down into this area roughly one, say,
one to eleven for Navidia. One eleven for Navidia is
still okay. That's still in the range of trend, and
it would still remain bullish if it stayed in that
(03:38):
range and then popped higher. And that's kind of been
what they've been doing historically with their earnings reports. They
go through maybe a little bit of a sell off.
The day that they are ready to announce, the markets close,
Navidia ends up slightly down. They blow away the data
and blow away the numbers, and then the next day
the stock goes straight up again. That's all it's been.
(04:00):
Why is that important? It represents close to seven percent
of the S and P five hundred at this point,
or close to it. I'd have to update some of
that data to get exact, but nevertheless, just know that
it's a big portion of the S and P five
hundred in terms of how it can move the SMP.
And so the S and P five hundred right now
is also in an interesting spot in that it is
(04:22):
getting not overbought yet for it to be overbought, i'd
need to see some green bars like this right, And
that doesn't always mean that it's going to go down.
As you can see here, this is price. It was
overbought and it didn't come down right. And so just
because it's it's getting us into a condition that could
(04:43):
be close to overbought, does not mean that it's going
to drop. Remember we're still in a bull market. Bull
market flows are still happening from CTAs, volatility control funds,
hedge funds, things of that nature, and as that money
comes in, it buoyes the index is like this. And
so if we got to pull back tomorrow to fifty
(05:03):
five to fifty five in the S and P, definitely
a spot where we would more likely than not maybe
add just a little bit of leverage to our more
aggressive accounts. And if it came all the way down
into this level it's just fifty five to ten, we'd
seriously consider about adding it up. And if it came
all the way down to trend here at fifty four
to fifty four, I would definitely add it back to
(05:25):
those more aggressive accounts. Are normal, non leveraged, what we'd
call moderately to moderate to moderately conservative portfolios, I guess
are pretty fully allocated right now to US equities and
international equities. Just as we continue to move in and
through an economic cycle where two things are happening that
(05:48):
I think are very very very important. Number one, monetary policy,
and this is just a function of what we call
M two. So you should be able to see this
great big screen. M two is just showing what the
money supply is doing, and if the money supply is increasing,
it makes it really really hard for the equity market
to get beat up that bad. Twenty twenty two was
(06:12):
a tough year, of course for markets, But look what
was happening to money supply. It was declining, it was degrading.
They were taking money out of the system, if you will, right,
that's not happening to that extent anymore. It's been accelerating,
as you can see there. The other thing that's incredibly
important is something called VIX term structure. This is for volatility.
(06:32):
Anytime we have VX one below VX two, it just
simply means that this is the VIX one contract planning
to expire currently ready to expire September seventeenth. VX two
contract expiration is October fifteenth. This is a normal relationship.
VX one is lower than VX two. Now why is
(06:53):
that important, Well, anytime vx one gets above VX two,
that's what's called backwardation. Backradation in the futures contracts and
of VIX is indicating there's a real problem somewhere that
more likely than not, is going to result in or
manifest in lower prices for the stock market. In fact,
(07:15):
if I were to go back and show and I'm
not going to do this because I would bore you
to tears, but if I would go back and show
you the day that the VIX term structure went into backradation.
In other words, VIX one went above VIX two, not
like what you're seeing now. VIX one is below VIX two.
But if it were way up in here above VIX two.
(07:36):
If I went back and showed you every single instance
that VX one was higher than VX two, you would
see a situation where the stock market ended up going
through some type of draw down or in some cases
even a full on drop, bear market or collapse every time.
So watching VX one in VX two for us is
very important. This is what we call conentangle. Contango's normal
(08:00):
raidation is backward. It's not normal. So when we see
that happen, we start to consider backing up and protecting
more than not. That becomes even more valuable and even
more important if we're in a macro cycle that is
more risk off than risk gone, and again even more
(08:21):
and more important that if we are already in a
trending bear market so none of those things are in
play at this time at least yet it changes every day,
so we watch it every day throughout the day just
to try and give us an indication of where risks
might be creeping in. And this is very steep and
so nothing is pointing at least to us as ooh,
(08:44):
that's a serious problem. We should watch out for that.
So those are the things that we're looking at right now.
For the S and P five hundred, we're looking at
this first level of fifty five to fifty five, the
next level of fifty five to ten, in the level
below that at fifty four fifty four. Those would all
be three decent spots to consider increasing the degree of
(09:05):
risk that we are willing to take. But even right now,
the flows that are coming into US markets, especially via
the options market, are showing to be very very strong,
and so therefore we're pretty well allocated bonds. I'm going
to show you this just real quickly. This is the
twenty year yield, this is the ten year yield, and
(09:29):
what it's showing me is what I've been talking about
in my morning emails. Both of those longer dated yields
are showing bearish trend, which just means that it is
more likely than not that we see a longer term
drop in interest rates or longer term cycling down of
interest rates as we kind of progress through this current
(09:53):
economic cycle. And you can see that on a longer
time scale. This is weekly, so each one of these
bars represents one week. You can see it broke through
this longer dated trend level. Again, price volume and volatility
rate of change over a period of three years or more,
it's much much different in terms of that kind of scenario. However,
(10:14):
this thing here, in this thing here tells me that
it would not surprise me to see price in this
case yield go from the current three point eight three
percent up to this level here, which is four point
one eight. Now am I expecting it to happen, No,
but the possibility is definitely there based on the way
that these other indicators are playing out. SAME's true for
(10:36):
the twenty year treasury, and so you get some backing
and filling. It gets them up and down, and it
creates an environment with yields where again, the economic cycle
is such right now where it is more probable than
not that we continue to see a decline in interest
rates not an increase, but we can have these moments
(10:57):
where interest rates on the longer side of the yield
curve go up a little bit, and it's just that
typical backing and filling that you get within a cycle
where bonds are bullish, interest rates dropping makes bonds bullish,
and when bonds are bullish, well, then that makes yields parish.
So my expectation is over the next several months, we're
(11:19):
going to continue to see a couple of things. Number One,
we're going to see the Fed cut rates more likely
than not in September. How much don't know. Some are
calling for twenty five basis points. We've seen markets planning
or expecting up to fifty basis points. Who knows, right,
it's anybody's gas Withinside that, though, we continue to be
(11:39):
within a bullish confine of US equity markets on the
S and P. Primarily, it is a much stronger index
right now than some of the other indexes, and a
lot of it has to do just with names that
would be more cyclical in nature or consumer oriented in nature.
You think of names like maybe Walmart or Target, things
(12:04):
of that nature, right which you know their sales and
earnings and numbers have been really pretty strong. So all
that is looking very very normal. The correlation grid and
I won't show you this because it'll make you google
the eye, but the correlation grid's valuable in that. What
we want to look for our correlations that start to shift.
(12:27):
And when I say correlations, I'm talking about stocks to bonds,
stocks to currency, stocks to yields, stocks to gold, so
on and so forth, right and then vice versa, And
right now they're very strongly positive pretty well across the board.
In other words, there's a point eighty one correlation with
the S and P five hundred in gold, there's a
(12:49):
point nine to two correlation with the S and P
five hundred and the Russell two thousand, a little bit
higher with the Nasdaq one hundred, a point seven corelation
with bonds longer dated bonds. Proxy for that is simple
TLT if you're interested in looking it up. But when
you have these correlations that are running the same, the
(13:10):
next thing I want to look at is the US
dollar and ask myself is it positively correlated as well?
And it's not. Right now, the correlation with the US
dollar across all those elements or all those indexes or
investments that I just mentioned are negatively correlated anywhere from
point seven all the way to point ninety six. And
(13:30):
so when you have that kind of a correlation scenario,
the dollar movement becomes very, very important. And when you
have a negative correlation with the US dollar, what we
have to look for then is to ask ourselves, Okay,
is the US dollar bullish or bearish? Well, here's a
picture of the US dollar, and as you can see,
(13:51):
the US dollars bearish trend signaling lower highs and lower lows.
And so that's interesting. Now it is over sold. So
when you get an oversold condition within a bearish environment,
it can go one in two ways. You can get
a short pop up to the lowest range, which would
be right here at about one oh one seventy five.
This is DXY by the way, this is the US
dollar index, or it can crash. Now, a dollar crashing
(14:17):
from here would move both stocks and bonds higher by
a fair amount. And so I'm I'm not in either
camp right now because I'm not seeing an indication that,
oh goodness, we're in a flat out scenario where the
US dollar is just going to collapse. We're not seeing that,
And I don't think the US government wants that to happen.
(14:41):
And so, yes, there is some dare I say, manipulation
that goes on within the hallowed halls of the Fed
to the Treasury. Yeah, there's always a little bit of
monkey business in that environment. But nevertheless, what the US
dollar index is telling us is it's trading in a
bearish trend. Again, rate of change, price fund in volatility
for a period of time greater than three months, and
(15:04):
so it's bear'st trend. It's bearish trade. So the momentum
players are pushing down on the US dollar, not up,
and so as that happens, as long as we see
these negative correlations along with stocks and bonds, if the
dollar continues to go down, as an investment manager, I
really don't care. In fact, I would prefer that because
it creates a tailwind behind the US stocks and US
(15:28):
bonds scenario of which we are large owners of right now.
And so having a negative correlation with the US dollar
in those elements is okay from an investment standpoint. Is
it great to see the value of the US dollar
go down in terms of purchasing power? No, no it isn't.
(15:49):
But this is not abnormal for what you would get
at this part of the cycle in an environment where
the markets are expecting the Federal Reserve to cut interest rates,
or if they cut interest rates, they're just paying less
on the value of that dollar. So if a citizen
or a foreign country were to hold US dollars and
(16:10):
they cut what they were getting paid for holding those
US dollars, I eat interest, well, then all of a sudden,
the demand for those dollars might not be as much.
That's very simplified. There are a lot of other dynamics
that go into the supply and demand of US dollars. Yes,
there's an awful lot of emerging market debt that has
to be paid back in US dollars and they don't
(16:33):
have enough of them. So you know, there's that dynamic
that acts as a tail behind the US dollar versus
as a headwind. So am I in the camp that
the US dollar is just going to get collapsed on
go away and cause all of us to have a
crazy amount of hyperinflation. No, I'm not in that camp.
Am I in the camp where we continue to see
(16:55):
this slow march lower until it stops? Yes, how do
we know when it stops? Well, it'll stop when it stopped,
But the first indication will be that it will start
to move itself higher. It will recapture its trade level,
which is that again price volume and volatility rate of change.
Over a period of less than a month, the momentum
(17:17):
players will start to kick in buying US dollars. It
then moves into bullish trend and at that point the
decline in the US dollar would probably be over. When
is that going to happen? No idea. Year to date,
the US dollars down point eight percent over the last month,
it's down three point six percent. Over the last three months,
it's down three point nine percent. So as you can see,
(17:37):
it's just trending lower. And as long as those negative
correlations continue to stick in in place with the US
dollar to stocks and bonds, there's not a huge aspect
of negativity that at least on the surface or underneath
the surface from what we can see from volatility regimens
and things of that nature, that would cause the US
(17:58):
stock market to have all sorts of problems. One other
thing that I think is important to view, and I'll
share my screen for this last thing, and then I
will get out of your hair. Is junk bonds. Now,
junk bonds are well, they're what they sound like. They're
bonds that are that are floated to institutions or businesses
(18:22):
or companies that have less than stillar credit. And so
when that happens, these companies have to pay a much
much higher rate of interest to maintain those loans. And
in economic cycles where we see massive amounts of weakness,
we see high yield bonds really getting clipped and going
down not just a little, but a lot. And I'll
(18:45):
show you what I mean. I'm gonna show you a
weekly chart and I'm gonna back this up all the
way into twenty twenty two, the last time we had
a real massive US stock market drop, and look at
what happened to price of junk bonds. I mean, they
jump up. Bonds in twenty twenty two went from eighty
seven bucks a year all the way to its low
down to seventy bucks a year. Right. That's a big drop, right,
(19:09):
And that was telling us early, even if I backed
up into twenty twenty one, HIYU bonds were having a problem,
and so it was an early indication that hey, there's
a problem economically happening right now. Well, look at it now.
Jump bonds just keep kind of slowly marching themselves higher,
staying above trade again, rate of change, price folument volatility
(19:30):
less than a month, staying above trend. You know, whenever
you have those conditions in an asset class where it
just comes down, bumps off, a trade moves higher, bumps
off a trade moves higher, that's very bullish. It's a
bullish trend signaling higher highs. Right. And so when you
have those kinds of things happening inside something like a
high yeal bond that more highly correlates to stocks, it
(19:52):
moves along with the same kinds of economic conditions that
you might you know that you might be able to
deal with with stocks. You kind of put them together
and say, oh, look at it. It's uh yeah, that's
a thing. So not a problem in how yield bond land. Okay,
that's it. I don't want to borrow you anymore. I
just wanted to give you some basic things to consider
and think about or watch. I guess just know that
(20:16):
I'm watching it, and I watch it every day all
the time US markets are open. Jonathan does as well
along with me. He couldn't make today's podcast, but definitely.
We'll get him back in again here after Navidiot earnings
because I'm sure there'll be some fun things to talk
about with how the action and markets moved them. So
until then, if you have any questions or if you
want to chat, reach out to me Chris at carefromidwealth
(20:39):
dot com, shoot me an email which is again christ
carefromiwealth dot com, or shoot me give me a call
six zero eight three five four one seven. That's my
direct line. If you want to use toll free, you
can do that eight sixty six five ninety six ninety
eight eighty six. Okay, thanks so much. Hope everything's well,
Have an awesome day, God blessed. We'll see you some
(21:00):
God him by the grave
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