The Bond Market Just Broke Why You Need to Act Now

Bond volatility just broke and it's about to have a massive impact on oil prices, stock prices and even interest rates. And right now, opportunity is knocking. I'm going to show you why you need to act now. But time on this is running out and fast. Because what we're facing now is a massive squeeze as bond volatility has plummeted. Because the oil rates relationship is already starting to crack. Because bond volatility has been moving almost one for one with crude. As we see bond volatility rise, crude oil prices are going up. But now that bond volatility is starting to plunge, what it's saying is that perhaps it's going to be a massive opportunity to destroy the oil market here in the near term future. And reinforcing the inflation narrative, also suggesting what it means is inflation likely to come down as well. But that link is now weakening as the move rolls over despite elevated oil prices. Check this chart out because you can very clearly see this is the move index in purple on what we've seen. It shot straight up and it went right alongside with oil prices. And right now, volatility in the bond market is dropping. This is a risk off sign. What that means based on this relationship is again oil prices likely to come down in the near term future, suggesting that the bond market is starting to see that things are easing up, that all this tight financial conditions is going to come unwound and perhaps very quickly. And as we see volatility in the bond market settles, what it does is it creates opportunity across the equity market. It creates even in the bond space and potentially to short oil here. Now the setup, it's no longer about the downside. Remember that was the case going into late last year into early this year. And now the question is, and this is a case I've been making. I've been saying, look, there's an opportunity to go long here. In fact, many of you know, I started putting on long positions late last week and I've continued to add to them every day on the S&P 500. And for good reason, because we're about to see a potential squeeze higher. Now, could it be wrong? Absolutely. But you're seeing the data is starting to validate that view because also what we're seeing is a potential rate reversal. Now, remember on the thought that inflation was going to go higher, what happened? The market drove interest rates up, financial conditions started to tighten up. And now what happened? We saw the equity markets come down. Now we're starting to see the opposite. As the move index goes down, it's saying rates are likely to come down and equity prices, well, likely to go higher. Because 10-year Treasuries rejected right at a major down line at 4.4%. Meanwhile, rate volatility has quietly collapsed. Again, this is something not a lot of people are watching. Let's take a look at this chart of the U.S. 10-year Treasury yield. That is in orange against the move index. That is in purple. And what do you see here is as the move index goes down, it's suggesting that interest rates are likely to come down. It doesn't mean they will, it just says they're likely to come down. And you can see kind of the general relationship as bond volatility drops. Generally, you see rates coming down. We can see that throughout the cycles here, again, indicating that the bond market is suggesting that whatever issues have been going on, whether it's with the conflict, with the economy, that it's not seeing as many danger signs as it once did. And what this is starting to set for is a massive reset. Because it's also going to impact the equity markets as the bond versus equity vol divergence has now collapsed. Remember that mid-March bond vol shock? Well, that's already been erased. Check out this chart. You see the move index is still in purple there against the VIX index in orange. And what you can see is that typically bond volatility leads equity volatility. So now as we're starting to see the move index collapse, it's starting to validate what I've been talking about with the VIX that is kind of the biggest leading indicator that perhaps stocks are about to make a move higher. Now, the other day, we talked about how the payroll report continues to show economic weakness. We have some more updates on the services sector as of today, and it's validating everything I've been talking about that we're in the early stages of stagflation. But does that mean that we can't see a short-term rally? Well, it doesn't mean that at all. In fact, it suggests we're about to see one. Let's take a look at the VIX indexes. Here's what I want you to see. We noted this range right above 25 between that and 30 on the VIX is a zone that if you see the VIX rise up into that level and it does not break out, well, what it does is it sets up a move lower, typically down to around 16. Due to the inverse relationship between the VIX and the equity market, what you're likely to see is stocks rally here as vol sellers are now starting to lead the charts. And this is what I was looking for today before I bought in. Were the vol sellers here holding steady? And they did. And so that added to my positions on the upside. Now, again, could I be wrong? Absolutely. But again, the data is starting to point to a short-term move higher here. Because the S&P 500 loves it when bond volatility resets fast and we've bounced off the lows. But with the move index pulling back, is this setting up the next squeeze? Well, let's take a look at this next chart of the S&P 500 against the inverse of the move index. And there you can see very clearly as the move index declines, again, is shown inverted there in purple. What happens? You see the S&P 500 start to rally here. And this is setting up for a very interesting chart. We're going to look at that in more detail here in a little bit. But I want to first talk about the CTA positioning. Because this is the big one. We've talked about how much of this move wasn't because retail investors sold. They really didn't. Wasn't because hedge funds sold. They just backed off some of their extreme leverage longs. It wasn't because institutional investors sold. They didn't either. It was all based on the machines. So now as we start to see the machines go into reverse direction here, we could trigger a massive amount of buying. Let's take a look because positioning has already been heavily reduced with $240 billion in global equity sold. And now it's putting CTAs near max short, particularly here in the US. Now, you may recall we talked about last week how Goldman's machines were coming off a deep short position. But keep in mind, Goldman's not the only investment bank that runs these things. Every major investment bank around the world does. And their trigger levels, they're all in different places. So what we do know is a vast majority of these machines are in deep short positions. Now, baseline buying is pretty modest around $55 billion. But convexity, it is the story here. Now, if the S&P 500 pushes through, and you got to put these levels in your notes, $6720 to $6740, we could see forced buying that could accelerate toward $200 billion plus, while downside flows are far smaller given how much they've already de-risked. So what we're seeing here is positioning isn't stretched anymore, but asymmetry is now pointing to the upside. So let's take a look at the charts here, because I want you to see where those lines are on the S&P. And what you can see is they're right above here. So today, we're in the green still as a time of recording. We've got some upside here at the 200-day moving average. There's heavy resistance still. You can see sellers been right here. But if you can get through the 200-day moving average and a run at these trigger levels, if those break, you're going to see a massive flood of buying in the market. So right now, the upside potential, and you can see that in the move index, is all saying higher equity prices, lower volatility. Now, let's take a look at the global equity positioning and systematic macro. This is across CTAs, risk parity, vol-weighted, and vol-controlled funds. And they're at fairly low points. And we've talked about this in the past. If you're looking to trade ahead of the machines, you just have to look at what point they're about to reverse. And throughout history, they've been a great sign of a market reversal. And all you need to do at this point is look to get ahead of them. And that gives you a lot of upside catalysts. So you're seeing right now, oil prices, move index is saying they're likely to come down, stand up a short opportunity. It's saying the VIX is likely to come down and the equity market likely to go higher, all in tandem, with interest rates dropping. Now, near-term, though support is limited. This week, we're indicating only $5 billion to buy. So the CTAs aren't big buyers here. Again, this is why I said in the intro, time is running out and why you need to act now if you want to chase this higher. Because as modest CTA re-risking is still offset by ongoing vol-controlled selling, but that is going to switch. That's why we looked at the VIX. Because as the VIX breaks back down, those vol-controlled funds are going to switch. Instead of selling, they're going to go back into buying mode. And again, the upside catalyst is huge. Because in other words, the mechanical bid is improving, but it's more of a mid-month tailwind than an immediate cushion. And keep in mind, there's another factor here. Do you know what else happens mid-month in April? Well, you typically see a lot of flows into equities as tax returns are starting to come in with their refund checks and people who don't need them to get by start looking at opportunities in the equity market. But there's another big catalyst and you've got to see this. Because nothing for the short-term traders in mind, but the general short-term continues to print new record high, meaning investors are still massively short, particularly the Russell 2000. So while I'm looking at the S&P 500, you may want to look at small caps. You can see right here, the short interest is way off the charts. But nevertheless, we've seen a rise in short interest on the S&P and the NASDAQ. So what happens here is if the move index continues to unwind and drop, this is setting up a massive squeeze, not just for those who are short, but also for the machines who have to flip and start to buy. And now you're starting to see this set up for a short-term rally in the markets before the economic data catches up with reality. Now, conditionally, if the market were to go up big, that's a 2x standard deviation or an 80% move over the next month, the buying increases largely to $220 billion during that time. But here's the big one of which $115 billion or more is about 50% U.S. based. So what we're seeing here is a huge tailwind into the U.S. equity markets. At the time underneath, the economy continues to slow. We've got some validation now from the ISM as we look to the services sector. Remember, we got the S&P Global last week. Now we've got the ISM. And the U.S. service economy expanded in March at a slower pace as employment shrank by the most since 2023. Here's the problem. Input prices accelerated sharply. So what are these signs of? Stagflation. And what happens in those scenarios? You get a weakening labor market. At the same time, you see price pressures rise. Consumers get squeezed. They can't afford to continue their spending. They cut back. And that cut back in spending is what pushes us right into a recession. But it can come with a surge in equity prices first. I'll show you that in a moment. Because the Institute for Supply Management's gauge of prices paid for the services and materials jumped to 70.7. That's now the highest since October of 2022. In fact, the 7.7% increase from a month earlier was the largest in nearly 14 years, comparable to the change seen in the group's manufacturing survey. And the ISM gauge of employment and service providers slumped 6.6 points, one of the biggest monthly declines since the pandemic, to 45.2. Now the headline numbers are saying this is last, but not necessarily on the forefront. This could also mean hours are being reduced first. That's typically what we see. Now we didn't see that in the nonfarm payroll report, but we're starting to see this in the service provider reports. Let's take a look at what's really going on and why any rally in stocks likely to be short-lived. Because one thing we're seeing is new orders are up 60.6. That's huge, growing at a faster rate. And backlogs, they are still growing, but at a slower rate. At the same time, what happens? Employment starting to contract. So what we're seeing here is service providers are saying very clearly, people are front running. They saw the surge in oil prices. They're trying to buy as much stuff before it impacts. And then they're seeing in the future, demand is going to drop. That's why you're seeing the employment part of this index start to decline. What they're saying is we see what's coming in the future and what this means though. It doesn't mean stocks can always go down. Check this out. Because if we look at periods where we go into stagflation, that's a period where consumer prices in blue are rising and the labor market is weakening as we look at the nonfarm payroll report in red. Overlaying incentive got the NASDAQ 100 in green. And what happened going into the 91 recession? Made a new all-time high before it collapsed. How about going into the dot-com bubble? It didn't make a new all-time high, but it got pretty close. And how about the global financial crisis? Well, definitely not a new all-time high, but for that cycle, it did. And then it started to plunge. So what we're seeing here is a setup in the equity market. And I want you to see this other part. I want to take a look at the charts here because this is a pretty big deal. And you can see the setup very clearly. So this is something we talk about with our trading group. But I want you to see as we go here and overlay the volume profile line, and what we can see as we zoom in to the 10-day, what happens? You see price sitting right above that 10-day volume profile. That's where the most shares have been traded. That's a bullish sign. Let's go through now to the 30-day window. And what do we see? Price sitting just above that as well. Potential left shoulder, head, right shoulder setup setting up a move higher in the market. And what's one thing that could change everything right now? Well, perhaps maybe there's going to be a ceasefire for at least 45 days. There's a big push for that. Maybe this whole thing in Iran comes to an end. But what we do know is the bond market is saying that whatever's going on that's been bothering it, well, it's not being bothered a whole lot more. And what that's setting up for is a big plunge in oil prices, a rally in stocks, a drop in volatility, and interest rates coming down. And for you, it's a huge opportunity. So now you can see it. With that, I'm Steve Van Meter. Thanks for watching. Thanks for being fans. Bye now.