Category: Interest Rates

The following is a review of the 10Year-3Month Treasury yield curve that moved above zero in December 2024. A recession is near.

Why The Yield Curve Inverts Before A Recession (The Real Reason)
August 17, 2023

Source: Federal Reserve Bank of St. Louis

Disclaimer

In September 2023 it appeared Market Makers started accumulating TLT. This accumulation is similar to what was accomplished between May 2010 and March 2011. The following charts show a 12.34 degree trend line supporting their accumulation process. After their accumulation was completed in 2011, the Fed sent a message announcing a plan to peg interest rates at ultra-low levels. This was meant to boost growth in the economy.

It appears they are currently planning to follow the same accumulation process using a 12.34 degree trend line. On January 6, 2025 Fed official Lisa Cook delivered a blunt message to the stock market noting that valuations are elevated.. Using this signal from the Fed, Market Makers can now work on wrapping up their accumulation effort. Over the last month extremely large blocks have continued to cross the tape. Market Makers will be finished long before the Fed announces any actions to lower interest rates.

By scrapping traditional theory it becomes possible to discover the true order of things, to show how the aspiration of investors can be linked to the aspirations of the specialist [Market Makers] as he proceeds to merchandise his stock.
Richard Ney, Wall Street Gang, 1974, page 88

Note that this information is for educational purposes only and not a recommendation.

Stock charts courtesy of StockCharts.com.

Disclaimer

On January 1, 2025 it was noted that the Federal Reserve started cutting the Fed Funds Rate by 1/2 percent on September 18, 2024. It also noted that the Fed appeared to be repeating their 2007 rate cutting process. The charts shown below have similar structural characteristics and trend lines. Based on the timing of current Fed rate cuts, a major stock market decline is expected in 2025.

Note that this information is for educational purposes only and not a recommendation.

Charts courtesy of StockCharts.com.

Disclaimer

On December 14,^, 2024 it was noted that the 30-Yr Treasury rate was expected to move lower in 2025. At the moment the Fed is in the process of repeating their 2007 rate cut pattern, as shown in the following NASDAQ chart. The second TLT chart reflects an expectation of a rate cut on December 18^th. Using the 2007-2008 TLT structure as a guide, a move upward going into January 2025 would be expected. Note that a 5th rate cut occurred on December 11, 2007.

Note that this information is for educational purposes only and not a recommendation.

Charts courtesy of StockCharts.com.

Disclaimer

On November 26, 2024 it was noted that there was a 70% chance of a sharp decline in the 10-Yr Note rate by year end. Looking at the 30-Yr Treasury rate there is an expectation that it will move lower in 2025. This is based on the following:
1. The 30-Yr Treasury descending triangle structure.
2. Futures data from net Total Reportable Positions on the 30-Yr Bond indicates they are significantly larger than what was recorded in 2019.
3. A significant increase in volume in products such as TLT.

Note that this information is for educational purposes only and not a recommendation.

Bond related charts courtesy of StockCharts.com.

Disclaimer

On September 28, 2024 it was noted that there is a 70% chance of a sharp decline in the 10-Yr Note rate by year end. This was based on the 2024 descending triangle that is similar to what occurred in 1982 and 2000. 10-Yr Non-Commercial Trader Net positions continue to remain in an extreme position. The expectation of rates starting a decline before the end of 2024 is still in place.

Note that this information is for educational purposes only and not a recommendation.

US10Yr Note chart courtesy of StockCharts.com.

Disclaimer

On May 16, 2024 it was noted that there were two key indications for a repeat of the year 2000. The 10Yr-2Yr charts shown below provide structural similarities as of November 7, 2024. The latest 10Yr-2Yr yield curve inversion started on July 6, 2022. Since September 6, 2024, it has remained above zero resulting in an inversion that lasted 26 months. On September 18, 2024 the Federal Reserve started their process of cutting the Fed Funds Rate by 1/2 percent. In comparison to 2000, the Fed started cutting rates after major Dow tech stocks collapsed. This time the Fed appears to be repeating their rate cutting process from 2007, as stocks are moving higher. A market decline and a recession in 2025 is expected.

Note that this information is for educational purposes only and not a recommendation.

Disclaimer

 

Since the Fed rate cut on September 18, 2024, Non-Commercial Traders have continued to increase their 10-Yr Note short positions. Non-Commercial Traders are expecting the value of the 10-Yr Note to decline as rates move higher. Ultimately rates will move lower as they did in 2007. This aligns with similar positioning of the Dow and S&P500 during the second week of October 2007.

At first glance it would seem Non-Commercial Traders are on the wrong side of the trade. The reality is they will chase this trade until the last minute and quickly unwind their short positions as the value of the 10-Yr Note moves higher.

Note that this information is for educational purposes only and not a recommendation.

Interest Rate charts courtesy of StockCharts.com.

Disclaimer

There is a 70% chance of a sharp decline in the 10-Yr Note rate before the end of 2024. This is based on the 2024 descending triangle that is similar to what occurred in 1982 and 2000. The reasons for each of the previous declines varied, but the end result was the same.

The latest 10-Yr Non-Commercial Trader Net chart is attached. In this chart the 10-Yr Note rate positions are near an extreme level, just as they were in 2018. The difference between the two extremes is the chart formations used during the topping process. In 2018 an ascending broadening formation was used. In 2024 a descending triangle is developing. The end result is both have the same goal of dropping rates.

Note that this information is for educational purposes only and not a recommendation.

Interest Rate charts courtesy of StockCharts.com.

Disclaimer

 

There are standard technical indicators that provide some insight into the direction of markets. Engrbytrade™ utilizes one technique of chart structure analysis during the course of specific time frames. TLT is an example. The basic TLT chart structure created between July 2006 and September 2007 is similar to the chart created between October 2023 and September 2024. The underlying difference between the two at this point is that the Fed cut rates in August and September of 2007. The first rate cut in 2024 occurred on September 18, 2024.

The Fed dropped their Fed Funds rate from 5.26 to 5.02 on August 17, 2007 in response to the subprime lending crisis and market instability. On September 18, 2007 the Fed Funds rate dropped from 5.02 to 4.94 in response to the mortgage meltdown.

The first rate cut in 2024 occurred on September 18, 2024 when they dropped the target range to 4-3/4 to 5 percent. No clear reason was given, other than inflation dropping to 2.5% in August.  Dropping their target range for the federal funds rate means something big is brewing in the background. Expect another rate cut on November 7, 2024.

Note that this information is for research and educational purposes only.  It is not a recommendation.

Disclaimer

On August 17, 2024 it was noted that the 10Yr Note rate dropped from 4.52 to 3.88 without a Fed rate cut. Since that time the Effective Fed Funds Rate was lowered by 0.5% on September 18, 2024. This action is a repeat of the Fed dropping rates on September 18, 2007 . A repeat of 2007 would lead to a select group of stocks making a rapid move upward before peaking in October 2024. To put this into context, seven figure blocks have been crossing the tape since September 18, 2024. This type of trading would be managed by Market Makers. It is expected that Market Makers and computer algorithms will drive retail investors to continue buying on the way up. Watch financial channels promote the fear of missing out.

Note that this information is for educational purposes only and not a recommendation.

Charts courtesy of StockCharts.com.

Disclaimer

On August 17, 2024 it was noted that mid-August 2007 and 2024 10-Yr Note interest rate structure positioning was in alignment, along with the Dow and S&P500. This would mean the value of the 10-Yr Note would rise as interest rates decline. At that time the 10-Yr Note Non-Commercial Trader chart was certainly what would be considered a “crowded trade”.

On September 3, 2024 the 10-Yr Note interest rate was still positioned for a decline. Non-Commercial Trader Net positions for the underlying 10-Yr Note were hedged to the short side. This means they are positioned for interest rates to rise.

The 30-Yr bond total reportable positions of clearing members, futures commission merchants, and foreign brokers are shown below. Their positions are also hedged to the short side and positioned for rates to rise.

 

Note that this information is for educational purposes only and not a recommendation.

Interest rate and bond chart courtesy of StockCharts.com.

Disclaimer

 

On August 17, 2024 it was noted that mid-August 2007 and 2024 10-Yr Note rate structure positions were in alignment, along with the Dow and S&P500. In addition to this the current 10-Yr Note rate position is in alignment with the February 2019 structure. Rates are expected to continue moving lower.

Note that this information is for educational purposes only and not a recommendation.

Interest Rate charts courtesy of StockCharts.com.

Disclaimer

On July 1, 2024 it was noted that bond traders were preparing for a stock market decline. It still appears that a stock market decline is expected based on the following.

1. The 10-Yr note rate decline starting in April 2024 is following the June – July 2007 decline with a 44.4 degree slope. (shown below)
2. Futures trader’s 10-Yr Note Non-Commercial trades are still setup for a decline in rates. (shown below)
3. Interest rates remain relatively high causing significant loan losses for regional and mid-sized banks.
4. The number of banks on chart 13 of the FDIC problem list increased from 52 in fourth quarter of 2023 to 63 in first quarter 2024.
5. The Dow is still following the 2021 structure time frame.

It looks like the Federal Reserve is following a path similar to 2007. On Friday, August 17, 2007, the Federal Reserve dropped the discount rate one half of a percentage point due to concerns about the subprime lending crisis. A FOMC meeting is scheduled for July 30-31, 2024 with no rate cut expected. A drop in the discount rate in August due to a “lending crisis” would provide a path for a significant market decline in 2025.

Stock charts courtesy of StockCharts.com.

Disclaimer

 

The following is a textbook example of what Richard Ney described in his book, Making it in the Market. TLT Market Makers were selling on light volume as they moved through a descending triangle, followed by a decline in 2023. Extremely large block trades started to appear in mid-November 2023 and still continue to occur. This is the current accumulation process where Market Makers are buying their wholesale inventory at the lows. When that is complete they will raise the price in order to sell at a higher retail price level.

“It is only when they (Market Makers formerly known as Specialists) are able to decline on light volume that they can afford to carry the decline to lower prices.”
Richard Ney, Making it in the Market, 1975, page 89

“To understand the specialists’ practices, the investor must learn to think of specialists as merchants who want to sell an inventory of stock at retail price levels.”
Richard Ney, Wall Street Gang, 1974, page 85

Note that this information is for educational purposes only and not a recommendation.

Chart courtesy of StockCharts.com.

Disclaimer

On April 20, 2024 it was noted that futures traders were repositioning trades with the expectation of declining rates. As of June 11, 2024 Non-Commercial traders were in a position similar to where they were on November 27, 2018. A decline in rates is still expected during 2024 and 2025.

Charts courtesy of StockCharts.com.

Disclaimer