The Bear Tracks Are Back

An old, familiar story... Stocks and bonds are down... The bear tracks are back... Follow the 10-year U.S. Treasury yield to victory... What to do today... Robert Kiyosaki talks spy balloons...

---

Today's market action told an old, familiar story...

Stocks were down. Bonds were down. And the U.S. dollar was up.

Based on those points alone, it could be 2022 again. After all, that's what happened for most of last year – if not the entire thing, in some of those cases.

But of course, it's not 2022 anymore. It's 2023. And what happens next remains to be seen.

In the short term, the market is playing out as we expected...

I (Corey McLaughlin) said in the February 2 Digest that stocks might be due for a pullback after one of the best January performances on record. And that's happening now...

On February 2, two major U.S. indexes made their most recent highs. Since then, the benchmark S&P 500 Index is down roughly 4%. And the growth-heavy Russell 2000 Index has fallen almost 6%, including a nearly 3% fall today.

The Dow Jones Industrial Average, meanwhile, has traded mostly sideways in recent weeks. But it has lost roughly 3% over the past few trading days.

And as I said, stocks aren't the only things that have turned back to "bear" mode lately...

Bonds are going bearish, too...

Remember, bond prices and yields have an inverse relationship. When one goes up, the other goes down... and vice versa.

The 10-year U.S. Treasury yield is up from around 3.4% at the start of February to 3.9% today. And it's almost back up to its October and November highs.

Given the inverse relationship, that means bond prices are down over that span.

This move could be a big warning sign for stocks...

Over the past 12 months, we've noted several times how the bond market has been "ahead" of the stock market when it came to pricing in things like Federal Reserve interest-rate plans and their influence on the economy and the markets.

You may also remember stocks hit their most recent bottom in October – back when yields were previously at the levels they're almost returning to right now. As we'll discuss in a moment, a clear relationship exists between bond-yield spikes and stock sell-offs over the past 12 months. And now, yields could be going even higher...

Forget rate cuts.

According to global-markets company CME Group's FedWatch Tool, a majority of bond traders now expect three more 25-basis-point rate hikes from the Fed. And these traders expect the rate-hike environment to last through at least July.

That would put the federal-funds rate near 5.5%. And notably, that's 50 basis points higher than these same traders expected one month ago.

The latest shift in market expectations came after recent inflation and jobs data appeared stronger than wanted in spots. And of course, the ensuing Fed commentary weighed into the shift as well.

The U.S. dollar rallying as of late – up 3% this month – reflects the same idea of higher rates from the Fed. And it continues to show that the dollar remains uncorrelated with stocks, which was a major story of 2022.

Pay attention to this market action...

We can't know for sure what will happen next. But I would urge anyone to at least take today's market behavior into consideration...

The bear tracks are back – at least temporarily and perhaps for longer...

Our colleague and Ten Stock Trader editor Greg Diamond looked at what's happening through his technical-trading lens earlier today. And in his Weekly Market Outlook, he shared some more thoughts on this idea with his subscribers.

Specifically, Greg wrote something at the start of the write-up that resonated with me...

The higher that stocks have rallied this year, the more bearish I've become.

Recently, I said something similar on the Stansberry Investor Hour podcast with Dan Ferris.

The quicker more people became bullish at the start of the year, the more concerned I get that the market could be due for another significant pullback. It's simply too early for us to officially declare the bear market dead.

Some evidence to the contrary exists, of course...

After all, stocks have rallied since last fall. And the major U.S. indexes have broken above their long-term trend lines – as measured by the 200-day moving average – for an extended period. That's different than the "bear market rallies" we saw in 2022.

We've also talked here about how a recession might've already been "priced in" to the markets. But importantly, I'm not sure the potential consequences of a recession – or higher-interest-rate environment – have been fully reflected in the markets.

But then, there's a big elephant in the bull-versus-bear argument. And it's maybe the most important point...

The major U.S. indexes also haven't made new highs yet. That's what normally happens in bull markets.

Greg believes we could still see a market low this year...

I don't want to give away too much from the research he sent to paid subscribers and Stansberry Alliance members this morning. But in short, Greg analyzed a big "divergence" in the price behavior of two stocks he uses as indicators in his trading.

One recent market leader hit what appears to be a recent "top." And the other popular stock from a growth sector keeps trending down and hasn't made a recent new high.

In other words, one sector – represented by the recent market leader – is doing one thing... as another sector – one of the most popular in the economy – is doing something else. This is a "divergence"... And it once again shows us that we're not in a rip-roaring bull market.

It's why Greg reminded his subscribers that market bottoms are a "process." And he doesn't think the process is over yet.

In fact, as he wrote today, the time frame for that low might be a few months away – or possibly many months away. And he explained why he's standing by an "updated, bearish approach."

Follow the 10-year Treasury to victory...

The behavior of bonds is another big reason why Greg remains bearish. As he told his Ten Stock Trader subscribers...

I want to update you on the U.S. 10-year interest rate and what it could mean for stocks. Check out this chart...

This interest-rate chart goes back to March 2022... I've highlighted consolidations (in red), breakout points (in black), and the sharp rallies in blue.

You can see that each consolidation was followed by a breakout. As the chart shows, these breakouts (combined with a rally in interest rates) led to a significant drop in stocks.

If you look at the trend line in February 2023, you can see that another breakout is underway.

This time probably won't be different, Greg said...

Let's put it this way... The interest-rate market sniffed out the inflation picture better than my dog sniffs out a piece of bacon on the kitchen floor.

As this chart shows, the consolidation-breakout pattern never ends well for stocks.

Just like with other markets, if this turns out to be a "false breakout" in interest rates – which means instead of a big rally, it reverses lower – I'll take that into consideration and change my outlook for interest rates. This would likely line up with stocks breaking out as well. But until that happens, this is a chart I must respect and can't ignore.

In short, don't ignore today's market action. It could be telling us more than you might think.

So what should you do?

Consider a few ideas...

If you look at your portfolio and find you're "out over your skis" in part of it – especially with stocks – now might be a good time to trim some positions to keep your portfolio well diversified and properly allocated.

And you may want to be wary of "jumping back in" to growth stocks or high "beta" names – at least if you have a short-term investing horizon. Put simply, the market doesn't look like it has put the "higher for longer" interest-rate story behind it yet...

The fact that bond yields are rising again is strong evidence. And for more proof, shorter-term yields remain higher than longer-term yields...

The "10-2" spread between 10-year and two-year U.S. Treasurys remains at negative 0.78% today. That's the lowest reading since 1981 (before a recession).

If you believe another leg down for stocks is coming, cash or cash-like assets can still be your friend. A three-month U.S. Treasury bill offers a nearly 5% annual yield right now.

However, that doesn't mean you should go "all out" with stocks...

High-quality businesses that reward shareholders with dividends and buybacks are always worth owning as core portfolio holdings. These rewards will compound in the "bad" times and pay off in the "good" times.

The bear tracks are back. And it's hard to tell how long they'll last.

But if you're properly prepared for the long haul, do your research (or follow ours) and don't put too many eggs in one basket. That way, you'll sleep much easier at night.

New 52-week highs (as of 2/17/23): AutoZone (AZO), BorgWarner (BWA), CBOE Global Markets (CBOE), Comfort Systems USA (FIX), indie Semiconductor (INDI), Madison Square Garden Sports (MSGS), O'Reilly Automotive (ORLY), and Flutter Entertainment (PDYPY).

In today's mailbag, feedback on Dan Ferris' latest Friday Digest and some more notes about the trouble with American railroads. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Hi Dan, The dentist with the chainsaw here. Where can I buy CPI? Hehe! That was one of your best, a laugh around every corner. From Tinker Bell and fairy dust, fun house mirrors, and inflation drug heads saying 'all clear', to revisiting the dentist with the chainsaw, it was wonderful humor with a great message: 'Prepare for a hard landing!' We need to be light hearted like Monty Python in an Atlas Shrugged world or we could lose our sanity.

"When you mentioned the Fed hitting the target, I thought of a hunting analogy (since besides dentistry and cutting up trees, I am also a hunter). The Fed (the hunter) can be proactive in choosing his stand near water, feed, and cover, and having the best scope and rifle, but when it comes down to hitting the whitetail deer (inflation and the economy), the hunter can only react to what the unpredictable deer does (i.e. stops behind a tree, runs by at full speed, or doesn't show up, etc.). Your message is clear 'We can prepare, we can't predict.' As far as I am concerned, the Fed's job on inflation and the economy is so bad, we might as well send the Fed out in the woods hunting with not a rifle, but a BB gun." – Paid-up subscriber Larry N.

"Great writing. I will save this article forever. Yes, I am with you... if CPI was a stock, you buy once and your generation would reap the rewards." – Paid-up subscriber Ashok V.

"How can you continue to confuse the issue with facts? Don't you realize someone with real power in D.C. might read this and conclude the fiscal lunacy of unlimited deficits cannot continue? That someone might conclude the return of economic sanity for this nation (and the world) is more important than their reelection or reappointment to their government position and gold-plated pension?" – Paid-up subscriber Robert B.

"I really appreciate the wealth of knowledge available here at Stansberry, amazing. What a privilege to have this available; thank you very much!!" – Paid-up subscriber Douglas H.

"When I was a kid in the '60s on the West Coast, I used to count the number of cars. The longest I ever counted was 105. I asked someone about it and was told there was a maximum limit of 100 FREIGHT cars, engines and cabooses did not count to the limit. So I was surprised to hear they were now doing 150+." – Paid-up subscriber William H.

"Great report, I have not heard this side of the story." – Paid-up subscriber Art S.

All the best,

Corey McLaughlin
Baltimore, Maryland
February 21, 2023