Volatility crept back into the market last week as the rout in the tech sector accelerated. Defensive sectors within equities are maintaining their near-term momentum, but last week, the Trinity model picked up on an even bigger shift - in a completely different asset class.
It’s an asset class that has been largely asleep for a few years now, but when things start to break, it offers traders and investors the highest degree of protection to ride out the storm.
Last week, this asset class exploded back to life, and in fact, I’d argue that this move has to continue in order for the tech sector to bottom, and ultimately, take stocks back to new all-time highs.
The Safe Haven Until Proven Otherwise
In case it wasn’t obvious, I was talking about the Treasury market. Despite all the problems at the federal level when it comes to the budget and debt, Treasuries still offer the perception of a “risk-free” investment. It’s why bonds tend to bid when volatility in stocks starts to spike.
Take a look at this weekly chart of the 30-Year Treasury futures.
We’re looking at the bond price here, not the interest rate. This means that if rates go down, this chart goes up. If rates go up, this chart goes down.
The reason bonds rally when things start getting crazy is because traders move from a mindset of growth to a mindset of protection. Bonds, in theory, are less risky than stocks, and when they start outperforming stocks, like they did last week, it’s impossible to ignore. It means it’s time to play defense.
We know the Trump administration wants lower interest rates. They’ve been in a public feud with the Fed. I can’t think of a better way to get the Fed to act sooner than for there to be some weakness in stocks.
And here’s the other thing - tech loves lower interest rates. If bonds sustain their bid here, rates will go down. This actually creates a backdrop for the tech sector to start outperforming again, and if tech starts to turn… well, it’s going to bring the whole market with it.
This is all part of capital cycles that take place within and between asset classes and sectors. It’s literally a case of weakness needing to play out before strength can return.
Watch bonds here near-term. The last thing you want to do is buy 30-Year Treasuries and hold them to maturity, but that doesn’t mean they won’t rally over the next few weeks as stocks figure out whether to break down meaningfully or not.
As always, I will keep you posted,
Gianni Di Poce
THEOTrade