An Interest Rate Top Could Telegraph A Market Bottom

An Interest Rate Top Could Telegraph A Market Bottom

October 12, 2022
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Looking back to the start of October, Monday, and Tuesday of last week were clearly different from what we experienced in the month of September. The 4% level on the 10-Year US Treasury yield is sort of looking like a line in the sand. In the market decline of late September, it got back up to 3.992% before it backed off and the US Dollar strength seemed to back off at the same time. Since these two have been moving up in concert as the stock markets of the world have declined, it has pretty much been the story of 2022. There are many studies, anywhere from Elliott Wave Theory to DeMark TD Sequential, TD Combo, and Exhaustion readings, that have also hit extremes that tend to occur at major turning points in markets and indexes of various types. We also saw some comments from the Bank of England and assurances from Credit Suisse that they are not in a Lehman Brothers / Bear Stearns moment. Again, comments tend to come at the end of declines not at the beginning. 

According to Cypress Capital, the psychology composite is rapidly approaching a point that tends to mark the start of relief rallies. It's also coming just as the Mid-Term November to April period is upon us. The November to April period that begins in a Midterm election year has averaged an 11.8% price return since 1930 and hasn't had a down period since 1946. They went on to notice that the NYSE Overbought/Oversold fell under -100 in the last week, an extremely oversold reading that only happens every few years. The average 12-month price return after a negative 100 reading was 18% for the S&P 500.

On October 7th, Fundstrat's Mark Newton noticed that longer-time US Treasury yields look closer than ever to peaking. He also mentioned that there is a confluence of DeMark indicators this week that could signal a temporary top in yields. These same signals happened at the June peak in rates that coincided with yields rolling over, and subsequently helping US Stock indices to rally sharply. 

The last market person I want to bring to your attention is one of my absolute favorites, Bob Brinker of the Bob Brinker Marketimer monthly commentary. Last week Brinker said that the markets are "attractive for purchase" for investors looking to invest money in the stock market. He believes that the S&P 500 index is in the area of the June lows and that this tends to produce substantial improvement in his underlying stock market technical indicators. His sentiment measures have reached extraordinary levels of bearishness, and he regards this contrary indicator as an important positive for equities. This also serves to reaffirm his market view that he expects his buy signals to lead to "major gains over the extended period of time." Even though it is another expectation, I find it particularly important. I have been reading Bob Brinker's monthly comments for over 20 years. He seldom makes a statement that it is time to invest capital. His record is about as perfect as anything I have ever seen. Going back to the Tech Wreck of 2000-3, these were 4 of his special report’s dates:

  • March 11, 2003
  • February 10, 2008
  • September 16, 2008
  • January 15, 2009

Every one of these was within 1-3 days of ultimate lows in the markets. But the one that is most recent that was amazingly perfect was the bottom he called on March 15, 2020. This was literally the bottom of the COVID low. I consider these pretty timely! Let’s hope that he is still accurate in his commentary!

One of the things that I expected to see that shows the Fed's rate hikes are working to slow the economy are the following:

Aside from employment, which tends to be a lagging indicator, we are clearly seeing declines in different measures of services and consumption. I will spare you with further explanation here as I believe that these pictures speak for themselves, but what is not being brought to the public’s attention by the media most recently that we feel are very important are:

  • August Money Supply Growth hits a 3-year low.
  • Real wages (after inflation) are negative for 17 straight months.
  • Consumer revolving credit surging to record levels.
  • 60% of US households live paycheck to paycheck.

I don’t bring these points to your attention to point out doom and gloom, but rather that the effects of higher interest rates by the Fed are clearly being felt and although inflation could stick around a bit longer, concerns over economic growth will take a role of great importance should these points become a concern.

In closing, Midterm year seasonality has swung distinctly favorable, with October in a Midterm year historically being the strongest month of all for stocks. Directionally this year has played out with a high correlation to the average seasonality for a Midterm year. See the chart below with an arrow indicating the action in the month of October since 1950:



The last picture I want to leave you with is the next one. Stocks have always gained a year after Midterms (No Matter Who's in Office) going all the way back to 1950:



Clearly, the markets of the world will do what the markets of the world will do based on variables that all have different levels of importance. What I am attempting to do is give some classic data that seems to repeat no matter what the economic, political, or international environments may be. As always we are available to answer any questions you may have, so please do not hesitate to call should any questions or concerns arise.


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