Be wary while US bond yields keep climbing

When I first started writing about rising US bond yields and their importance for the trend in US share prices the yield was two point something. Now it is four point something with no sign that the rise is over. It has already been staggering in its scale and rapidity by comparison with other periods of rising bond yields. It is no wonder that the US stock market and especially much followed high value US growth shares have endured wave after wave of profit taking.

As we are seeing companies are still producing impressive results, names like Netflix, Roblox and Intuitive Surgical. These positive announcements trigger sharp rallies but I do not think it is wise to chase them as long as my Coppock indicators are falling and bond yields are rising.

Governments and central bankers are not infallible. I am not especially talking about Liz Truss here but there you go; doing the right thing is not easy and so much is about perceptions. The authorities are trying to balance conflicting objectives. They want to keep the voters happy which often leads to short term palliative measures. They want a more entrepreneurial economy which often means tax cuts which can always be portrayed as favouring ‘the rich’. And right now they want to bring inflation under control and that is a painful process. It would be great if inflation would just go away but if it doesn’t we have to get on top of it which means bringing supply and demand into better balance.

At the moment we have continuing strong demand and inadequate supply leading to the famous shortages which are driving prices higher, sometimes explosively higher. Eventually everything will be discounted by share prices, we will be able to look over the valley to the sunlit uplands beyond, the worst will be over and a sustained rise in shares will be underway. There is no hard evidence as yet to suggest that we are there yet. It remains treacherous in global financial markets.

Above is my trusty QQQ3 chart, showing a UK-quoted ETF which tracks the Nasdaq 100 times three, with the additional impetus, which can be large, of being rebalanced every day. This is momentum investing with a vengeance.

After a long period heading higher, with periodic corrections, the chart is heading lower. The fall looks very much the inverse of the rise in US bond yields. As I have suggested there is a simple relationship. Bond yields go up, bond and share prices go down. Bond yields are still going up, my provisional forecast is that they are heading for five per cent. This makes it dangerous to buy shares and cryptocurrencies which are subjected to similar logic, bond yields up, crypto prices down.

I am trying to monitor this activity in charts and draw my conclusions accordingly. I don’t suppose any system is perfect but I have gone on record as saying I expect bond yields to go higher, share and crypto prices to go lower and the bear market to end next Spring. We shall see and obviously, like Keynes, if the facts change I will change my mind.

Like individual stocks, share markets overall respond to big ‘something new’ developments. One huge ‘something new’ was Covid and lockdowns which initially seemed bearish but quickly proved hugely bullish for shares, especially cutting edge technology businesses and anything which benefited from work from home.

The next big ‘something new’, aided by war in Europe, was an explosive rise in interest rates which had a negative influence. There will be more such ‘something news’ and we need to watch out for them.Underlying the rise in interest rates has been higher inflation as years of easy money meets supply shortages.