The Fed Raises Rates; What If it's Already Priced into the Market?

Markets discount the future, so if the Fed tells the market it's going to raise rates, it goes ahead and raises them anyway. Why wait on the railroad tracks when you know a train is coming? Ironically, the widely-telegraphed rate rise has arrived at a time when bond yields across the board have begun to run into mega resistance. Perhaps it's time for some corrective activity on the part of yields?

Market Leads the Fed

Chart 1 compares the Fed-controlled Federal Funds rate to the yield on the 2-year treasury. Please note that because the funds rate is only updated monthly on the StockCharts database, the latest hike does not yet show up in the chart. Regardless, the green and red arrows point up that, most of the time, the bond market, in the form of the 2-year yield, leads the "lagging" Fed at both peaks and troughs.

There is no sign at the moment that the 2-year is peaking, but it is evident that the yield in Chart 2 has run into mega-resistance in the form of its 1981-202? trendline. The KST is also at a record, which suggests incredible upside momentum consistent with a very long-term or secular reversal. That said, momentum doesn't rise forever. Going forward, more of the parameters used in the calculation of the KST will be compared to periods when the rate not only stopped going down, but was involved with the early stages of the post-2020 rally. In short, the KST is likely to peak at any time.

The red arrows show that previous KST downside reversals were generally followed by a primary trend decline. This leaves us with the likelihood that a new secular bull market, characterized by the record-breaking KST, is running into its first technical challenge, in the form of that the overhead resistance combined with the potential for a near-term KST peak. In other words, down now, up later?

Secular Reversals Usually Take the Form of a Giant Trading Range

This idea of renewed accumulation is consistent with previous secular reversals going back to the nineteenth century. Chart 3 looks at that aspect with the 10-year yield. The pink shading identifies the head-and-shoulders top that developed at the top of the post-World War II secular bull market. The blue shading offers a possible base-forming scenario for the termination of the 1981-20?? secular bear. Note that the 10-year, like its 2-year counterpart, is bumping up against its secular resistance trendline. The KST is once again at a record level, suggesting that the secular trend may have hit bottom in 2020. However, resistance at the line again weighs in, with the possibility of a correction coming first.

Yields of Most Maturities Challenge their Secular Down Trendlines

The 20-year yield is featured in Chart 4. Most impressive is the record-smashing 24-month ROC which, coming off a major bottom, again represents a characteristic of  a secular reversal. The yield has completed a reverse head-and-shoulders formation and has the potential to ultimately move higher. For the moment, though, it is also running into resistance at its secular down trendline. If a correction does develop, it is likely to be contained at support in the form of the extended neckline.

The 5-year maturity offers a link between shorter- and long-term maturities. Chart 5 shows that it has also just rallied to its secular down trendline. In this instance, the history only goes back to the mid-1990s, but the message of massive resistance is the same. After all, the line has been touched or approached on numerous occasions and is lengthy enough to be regarded as a significant barrier. The 24-week ROC is once again overextended and could therefore be close to peaking again.

International Bonds at Resistance

Bond markets are not only at resistance in the US, but around the world as well. In that respect, Chart 6 shows that British, German and Japanese 10-year bonds have all reached multi-year trendlines, with a slight breakout by the British Gilts.

Arithmetic vs. Log Scaling

Chart 7 features the 30-year yield. It is evident that this ultra-long-term maturity has not yet reached its secular down trendline. That said, if we plot the same series using arithmetic scale, the yield is very slightly above the solid secondary secular down trendline. That's because arithmetic down trendlines are penetrated more quickly than those drawn on a log scale. The opposite is true for up trendlines. The true (dashed) secular down trendline joining the 1981 top to the 1984 was penetrated many years ago, well ahead of the final low and thereby offering a premature signal. It's an example of why log scale is the preferred technique in almost all long-term situations.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.