For consistency, here are the key go-tos during an uncertain time in the market:

The next direction of long bonds (TLT).
The next direction of the small caps and retail sectors (IWM, XRT).
The next direction of commodities, all of them, but particularly the agricultural ones, oil and precious metals (DBA, DBC).

There are other relationships to watch, like our risk gauges (all still risk-on). And, of course, there are stocks that will outperform, like what we saw on Monday in defense companies (PLTR). Overall, though, and to simplify the macro, these top 3 points should help a lot.

The first chart is the monthly charts of small caps and retail (IWM and XRT). The 80-month moving average (green line) is a longer-term business cycle or about 6-7 years. Besides the blip during COVID, IWM has not broken that 80-month MA since 2010. XRT sits right above the 80-month. To remain bullish, those lines must continue to hold.

We have seen lots of mean reversions and reversal looking bottoms in TLT. They have been fake outs. What we do not want to see is TLT outperform SPY (Leadership indicator remains risk on as long as SPY outperforms). Furthermore, we can see TLT rally along with SPY if SPY continues to outperform.

The best signal for watching a TLT rally is the 10-DMA or cyan line. TLT has not been above that since September 1st.

A strong rally in TLT where SPY begins to underperform could signal risk-off. Moreover, it could negatively impact equities as fears of recession or hyperinflation kick in.

In the commodities world, DBA and DBC offer a good way to assess the spectrum of raw materials and inflation. We like this, as commodities are a big focus during wars and geopolitical stress.

Also this week, we will see PPI and CPI numbers come out. While oil, gold, precious metals and miners were up today along with some soft commodities (sugar, coffee), grains were red.

Looking at DBA (on the left), it is underperforming SPY and in a caution phase trading under the 50-DMA (blue). Could DBA rally? Sure. Over 21.80, we would begin to think more bullish in agriculturals. DBC (on the right), more oil- and precious metals-focused, is also underperforming the SPY. That is surprising and supports a risk-on environment. Through 24.75 that picture changes.

Should oil and PMs start to outperform the SPY, then the inflation conversation begins to dominate. Hence, right now, risk-on prevails.

Commodities strengthened after they became oversold. But they remain weaker than the SPY. And long bonds are also experiencing buying — but it’s too soon to know if yields have topped. And if they have, is it for the right reasons?

This is for educational purposes only. Trading comes with risk.

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