The market is obsessed by higher interest rates. TLT is down more than 2%. XLU broke below its 200dma (a major change in trend),. IYR, another interest sensitive sector, is down almost 3%.
The corporate bond market is acting much better. It is down, but the decline is contained. HYG declined only 0.56%. JNK is losing 0.44% of its value. LQD is down 0.94%.
The market is trying to tell us that it fears higher interest rates due to the strong labor market. The interest rate sensitive sector is weak.
But if the market fears a strong economy (the reason for higher interest rates) why is copper down 2.03%? GLD is down 2.70%. XOM is down 1.16%.
My point is if the economy is so strong as suggested by the labor market we should see strong commodities and a weak bond market. Instead they are both weak.
If, on the other hand, the market is sinking because higher interest rates may cause an increase in credit risk, we should see the low-grade bond market acting poorly and definitively much worse than Treasuries - which is not the case.
High-yield bonds stronger than Treasuries suggest the decline is not caused by increasing financial risk.
One more thought. The break is coming with relatively low volume and yesterday's post suggested a correction was coming.
In days like today we have to rely on our investment process. Of course, no investment process is safe. We know this.
The purpose of the investment process is to help us navigate through difficult times. In other words, the investment process is needed to manage risk.
This is one of those times.
George Dagnino, PhD
The Peter Dag portfolio
The Peter Dag portfolio
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