Market Analysis

Mission Critical

As markets are on the cusp again with only a few trading days remaining before year end it is time to revisit the most important chart in markets. I’ve shown this chart in various forms for the past year and it shows the relationship between $SPX and the 10 year yield in context of the broader economic cycle as expressed by the unemployment rate.

The chart is mission critical as it highlights where we are in the broader macro sense:

Let me highlight several key components of the chart:

Previous bull markets ended when multi year channels or wedge patterns broke their long term trends. Currently $SPX is at risk of breaking its 2009 trend. It may save it again for the third month in a row into year end and, if it does it, it has room to rally again. But be clear, when this trend line breaks, and it eventually will, the price consequences will be substantial as evidenced by previous breaks.

Notable here too is that the lows following the 1987 crash marked the beginning of a multi decade trend line that initially found support at the 2002/2003 lows, but then was broken the downside during the financial crisis in 2008. This trend line has remained resistance to this day, firstly in 2014 and 2015 and then again earlier in January 2018 and September 2018. All of the attempts to break above this trend line have failed.

The combination of the 1987 trend line and the 2009 trend line have formed a massive rising wedge that is narrowing dramatically.

Also note the break of the most recent bull markets, 2000 and 2007, coincided with the 10 year peaking near its multi decade trend line dating back all the way to 1982. It is during these yield peaks we’ve witnessed the end of recent economic cycles as shown by the change in the unemployment rate. Low unemployment rates have no history of sustaining themselves. They can extend but they can’t sustain.

When business cycles end central banks (for decades now) have reacted with lower rates to combat recessions. The unemployment rate is currently at 3.7% while recession risks have been rising and many economists and CFOs are now expecting one to arrive in 2019 or 2020.

2018 also saw a yield scare as the 10 year pushed toward 3.2%. But it’s actually the rejection of yields from that particular level that serves as a warning sign.

Hence it is particularly notable that the 2018 yield scare ended precisely at the 1982 trend line repeating a familiar historical script and that is the Fed is looking to pause its rate hike cycle into 2019.

What’s the message of this chart?

Simple: Unemployment will rise at some point and $SPX will break its trend line eventually. Be it this month or at some future month to come. Both things will happen and the 36 year history of this cycle chart implies that the Fed will eventually have to intervene again. Because they’ll have no choice. And then the cycle repeats itself. One problem though: With each cycle the system ends up carrying more and more debt and the Fed’s ability to generate sufficient ammunition to deal with the next downturn becomes ever more limited.

These trend lines matter big time, they are mission critical. Right this moment.

You can see how everything in markets centers around these trend lines and the synchronicity of it all can’t help but impress.



$DJW (Dow Jones Global Index):

Perhaps markets have never needed a Santa rally more than now. Perhaps the Fed realizes this. We’ll find out next week.

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