The Week in Charts

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This week we'll walk through some charts that will frame up where things stand in the 10yr yield, the S&P 500 and the Nasdaq Comp, and in gold, silver, the dollar, and real yields.

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We're coming off of an interesting week in the markets. Let's take a look at where things stood heading into the weekend.

Rates

Safety flows related to the increasingly tenuous relationship between the U.S. and China found their way into the long-end of the U.S. Treasury yield curve, driving the 10yr and 30yr yields down to the lowest levels since April and flattening the yield curve to the narrowest since early May (5yr vs 30yr to +96bps).

The 10yr yield traded down to the lowest level since April overnight ahead of Friday's session with the tit-for-tat consulate expulsions and a terse foreign policy speech on China by Sec'y of State Pompeo inspiring safe haven flows.

Yields bounced during New York hours, however, allowing the 10yr yield to recover above a mid-channel trend line (light blue) and pushing it back up toward the upper end of the parallel channel.

For this coming week, the upper channel and the 10 day moving average both reside at .607%. These technical levels require respect as support (yield resistance) until they are penetrated (to the upside) on a closing basis.

On a long-term basis, here's an updated view of the secular bull trend that originated in the mid-1980s. Note that the 10yr yield has moved beyond the critical timeline (May'19) when the lower trend line was at or above the zero (0.00%) line.

Ever since, for the yield to retest the lower line, it will need to move negative. Currently, the lower trend line comes in around -0.25%. It is declining too, so with each passing week, it will take a deeper move into the negative to retest the line. The last five (5) times when the 10yr yield moved below the previous low where it bounced from the line, it proceeded to trade down to the trend line.

The 10yr yield has moved below the previous low again. This suggests it will turn negative on its way to revisiting the multi-decade trend line.

Liquidity and Equities

Global central banks have been flooding the financial markets and the global economy with liquidity via the rapid-fire, emergency pandemic monetary and fiscal support.

In the next two charts, we can clearly see how the expansion (by the trillions - $88T combined) of the global money supply and the Federal Reserve's balance sheet lifted the S&P 500 up from the March lows and carried it up toward the pre-pandemic highs.

The measure used to estimate the global money supply is a proxy index created by Bloomberg that sums up M2 for the Eurozone, China, United States, Japan, South Korea, Australia, Canada, Brazil, Switzerland, Mexico, Russia, Taiwan. Figures are in USD.

The $3 trillion expansion in the Fed's balance sheet (through asset purchases and repo) has also contributed.

Notice, though, how the balance sheet has plateaued and begun to shrink. It's no coincidence that the S&P 500 has also stalled since late May, only able to gain +1.35% since then and having a couple of draw downs, the largest on the order of 7.00+%.

S&P 500 Dividend Yield

It's always good to check in on the spread between the dividend yield on the S&P 500 and the 10yr Treasury yield.

Estimated at 1.81%, the dividend yield is +1.23% higher than the paltry .58% yield on the 10yr. This attractive spread sometimes gets lost in the shuffle as one of the reasons for the strong bid in equities. There is no alternative (TINA), or so the story goes.

Technical Set-Up - Nasdaq Comp and S&P 500

Since April, the Nasdaq Composite has been trading in a well-defined, upward sloping, parallel channel. With the technology sector under performing recently, the index traded down to the lower trend line on Friday and bounced smartly. The trend line was down at 10217 and the Nasdaq closed at 10363.

The index also bounced from the vicinity of the 30 day moving average (dma - red line) at 10234. Technically, this is positive. A close below the MA and the trend line would be a negative development.

On the daily chart, the S&P 500 (SPX) violated the low end of the steep parallel channel highlighted in light blue on Friday. That move came after the SPX failed up at 3279 in three consecutive sessions during the week (Tues,Wed,Thurs).

You can see that the SPX is also trading in a broad range highlighted in dark blue. The 30dma at 3147 is in the middle of that broad range. With the SPX closing below the light blue trend line, the 30dma becomes the next target. The index closed at 3215 on Friday.

We always like to look at longer time frames too. The chart above is a weekly, meaning each vertical line encompasses the range from an entire week. The SPX is holding in an upward sloping channel. The upper boundary is at 3360 and support is at 3120.

Silver, Gold, the Dollar, and Real Yields

Silver had back to back sessions of +7.00% gains (Tues & Wed), leading gold to the upside for a change. The weak U.S. dollar, record low inflation-adjusted (real) yields, safety flows, and momentum all carried the precious metals higher during the week.

This next chart is the ratio of the spot prices of gold vs silver along with price charts of the individual precious metals.

The shaded areas illustrate that the ratio (black line) typically has these steep downward adjustments when gold and silver are spiking higher. This is exactly what we've seen since March. More recently, silver finally woke up this week to trade north of $20/oz for the first time since 2014, and it accelerated to the upside.

Don't let the chart scale fool you. At the week's $23.27/oz high, silver was up +20.45% on the week while gold was up just +5.30%. Clearly, gold out performed silver since 2018, driving the gold/silver ratio up to 146 (one ounce of gold bought 146 oz of silver). With silver starting to catch up, the ratio tightened to 83 last week.

The ratio looks like it has more downside momentum that will continue to push it lower. As I noted previously, that would mean that the metals have more upside ahead. Gold is nearing the Sept'11 $1921 high, however - a long term target. Once there, a downside correction is probable before gold and silver make another run higher.

As I implied at the beginning of this segment, the weak U.S. dollar and record low inflation-adjusted (real) yields have had a big hand in the strong rally in the precious metals in 2020. A picture is worth a thousand words.

Gold vs the U.S. Dollar Index

Gold vs 10yr Real Yield

Good luck out there! Don't let the relative quiet lull you into a false sense of complacency. It's still a treacherous environment subject to sudden bouts of volatility that could become even more dicey due to the illiquid summer trading conditions.

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This article is part of my LinkedIn Newsletter Series: Indicators and Insights – Perspectives on the Top Financial Market Movers with a View of What's to Come.

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