Bonds Took Off for The Moon!! Are Interest Rate Cuts Upon Us?!

Understanding the inverse relationship between the stock market and bonds

Hey, MFG!

Bonds (TLT/TMF) continue to climb higher and are now trading at an extreme-high RSI reading. The three major indexes tracked by the MFG portfolio—the Dow Jones (DIA), Nasdaq (QQQ), and S&P 500 (SPY)—are all in stage 4 declines trading at near extreme-low RSI readings.

The Nasdaq (QQQ) briefly dipped below its 200-day SMA, but closed back above it. Gold (GLD) has been trading in the same range since April and may be forming a possible stage 4 decline. Bitcoin (BTC) is also in a stage 4 decline, trading below its 200-day SMA at a near extreme-low RSI reading. Oil (USO) is similarly in a stage 4 decline below its 200-day SMA.

Market sell-offs are normal and present excellent opportunities for building wealth! Be patient here, stay in flow, and wait for prices to stop dropping and see confluence of The Money Flow indicators. Remember, “The Wind” is no longer at your back.

For those who have followed me for a while, you know I’ve been building my position in the 3x leveraged bonds trade TMF for over two years. Bonds are finally performing as expected—going up when the stock market falls.

Today, I trimmed my TMF position and rolled profits forward into BITO. Kellanova (K) also saw a a nice pop, hitting an extreme-high RSI reading, so I took some profits. I closed my B&B trade in McDonald's (MCD) for a solid gain as it hit its target, the 200-day SMA.

Despite the Nasdaq (QQQ) being in a correction and major indexes selling off, it was a profitable day for the MFG between day trading TQQQ and trimming TMF and K.

It's amazing to see bonds performing well now after being nothing but a train wreck over the past couple of years! Typically, bonds increase when markets fall and bonds go down when the markets go up. We’re finally witnessing this inverse relationship between bonds and the stock market.

Could the Federal Reserve's discussion about cutting interest rates in September be driving the bond rally? Perhaps. They’re many factors to consider when analyzing the bond-stock relationship. Let's dig into understanding the inverse relationship between the stock market and bonds.

-GP a.k.a Fullauto11

The Peters Report - Stock & Crypto Trader’s Resource

Looking for a group of likeminded people to trade with? Text alerts and the MFGDiscord. Text GP 1-936-661-7786 or email GP fullauto11@gmail.com to join.

Bonds Took Off for The Moon!! Are Interest Rate Cuts Coming Soon?!

Bonds typically trade upwards when the stock markets are going down. Usually, bonds and the stock market have an inverse relationship. As an investor and a trader, you must be aware of the dynamics between bonds and the stock market.

• Safe-Haven Investment: During periods of political and economic uncertainty or stock market downturns, investors often shift their money from stocks to bonds. This flight to safety increases the demand for bonds, pushing their prices up and yields down.

• Interest Rates: Central banks, like the Federal Reserve in the United States, may lower interest rates to stimulate the economy during downturns. Lower interest rates make existing bonds with higher coupon rates more attractive, increasing their prices.

• Economic Indicators: Positive economic news can lead to higher stock prices as companies are expected to perform better, while bond prices may fall because investors anticipate rising interest rates or better returns from stocks. Conversely, negative economic news can result in higher bond prices and lower stock prices.

• Inflation Expectations: Inflation affects bonds and stocks differently. Rising inflation expectations can hurt bond prices because the fixed payments from bonds lose purchasing power, while stocks may benefit if companies can pass on higher costs to consumers.

• Diversification and Risk Management: Investors diversify their portfolios to manage risk. When stocks are underperforming, the demand for bonds increases as a risk management strategy, leading to higher bond prices.

It’s important to realize that this inverse relationship is not always perfect. There can be periods when both stocks and bonds move in the same direction due to unique economic conditions, policy changes, or market sentiment. Let’s dig into different times in history when the inverse relationship between bonds and the stock market correlated and did not.

Times When The Inverse Relationship Correlated

1. 2008 Financial Crisis:

   • Stock Market: The stock market experienced significant declines as financial institutions failed and economic uncertainty soared.

   • Bonds: U.S. Treasury bonds saw increased demand as investors sought safety, leading to higher bond prices and lower yields.

2. Dot-com Bubble (2000-2002):

   • Stock Market: The burst of the dot-com bubble led to a sharp decline in tech stocks and broader market indices.

   • Bonds: As investors moved away from the volatile stock market, bond prices rose, particularly for government bonds.

3. COVID-19 Pandemic (Early 2020):

   • Stock Market: The initial onset of the pandemic caused a sharp decline in global stock markets due to economic shutdowns and uncertainty.

   • Bonds: Investors flocked to the safety of government bonds, driving up prices and lowering yields.

Times When The Inverse Relationship Didn’t Correlate

1. Great Inflation (Late 1970s to Early 1980s):

   • Stock Market: Stock prices were highly volatile and generally performed poorly due to high inflation and economic stagnation.

   • Bonds: High inflation eroded the value of fixed income payments from bonds, leading to poor performance in bond markets as well. Both asset classes struggled during this period.

2. 2013 Taper Tantrum:

   • Stock Market: When the Federal Reserve announced it would begin tapering its quantitative easing program, stock markets initially reacted negatively, but recovered quickly.

   • Bonds: Bond prices fell sharply as investors anticipated rising interest rates, leading to higher yields. This period saw both stocks and bonds decline temporarily.

3. Post-2020 Recovery:

   • Stock Market: After the initial pandemic-induced crash, stock markets rallied strongly due to fiscal stimulus, low interest rates, and economic recovery optimism.

   • Bonds: Despite the stock market's recovery, bond yields remained low due to continued central bank support and low interest rates. This period saw stocks and bonds sometimes moving in the same direction.

It’s been a while since bonds and the stock market moved in the opposite direction.

The period following the initial COVID-19 pandemic-induced market crash in early 2020 provides a notable example where the traditional inverse relationship between bonds and stocks did not always hold.

In March 2020, global stock markets plummeted as the severity of the pandemic became apparent. Investors reacted to widespread economic shutdowns, uncertainty, and fears of a prolonged recession.

At the same time, investors sought the safety of government bonds, leading to a significant rally in bond prices and a drop in yields, with the U.S. 10-year Treasury yield falling to historic lows.

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Bonds & The Stock Market Post-2020 Recovery

During the post-2020 recovery, governments and central banks worldwide implemented unprecedented fiscal and monetary stimulus measures to support economies. This included direct payments to individuals, extended unemployment benefits, and extensive bond-buying programs by central banks (quantitative easing).

These measures kept bond yields low despite the recovery in economic activity and rising stock markets, while the influx of liquidity and fiscal support boosted investor confidence, leading to a strong recovery in stock prices from the March 2020 lows.

As vaccines were developed and distributed, economies began to reopen, leading to a resurgence in economic activity. The expectation of robust economic recovery fueled further gains in stock markets, with many indexes reaching new all-time highs.

Despite the economic recovery, bond yields remained low for an extended period, partly due to ongoing central bank interventions and a continued perception of bonds as safe assets during times of geopolitical and economic uncertainties.

By mid-2021, concerns about rising inflation emerged as economic activity picked up and supply chain disruptions persisted. Inflation fears led to increased volatility in stock markets, with growth stocks particularly affected due to concerns over future interest rate hikes.

Bond markets experienced fluctuations as investors adjusted their expectations for future interest rates. Despite periodic increases in yields, central bank policies and ongoing demand for bonds kept yields relatively contained.

As inflation continued to rise into 2022, central banks, including the Federal Reserve, signaled potential rate hikes and tapering of bond purchases. The anticipation of tighter monetary policy led to increased volatility and periodic declines in stock prices.

Bond yields began to rise more significantly in response to expected rate hikes, leading to price declines. This period saw a more traditional inverse relationship as rising yields (falling bond prices) coincided with stock market volatility.

Overall, the post-2020 recovery period highlighted the complexity of the bond-stock relationship. While traditional inverse dynamics were evident during the initial pandemic response, the extensive fiscal and monetary interventions created an environment where both asset classes could perform well simultaneously for a time.

GP’s Wrap Up

Historically, bonds go up when the stock market goes down. We could see a beautiful long-term uptrend underway in Bonds (TLT/TMF) if the Federal Reserve decides on several interest rate cuts.

In the mean time, be patient and follow your charts everyday to be in flow. There’s no reason to be scared here. A market correction is just another opportunity to get RICH!!

"There is no such thing as lack of opportunities for the man who is living the advancing life, and who has an advancing mind." - Wallace Wattles, The Science of Getting Rich

Always remember, whatever you think about comes about, whatever you focus on grows. - GP

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