Fundamentals and technicals represent the two main schools of thought when it comes to market analysis. Fundamental analysis focuses on all of things outside of the market that could/should have a bearing on the market (i.e. economic data, covid numbers, Fed policy, Fiscal policy). Technical analysis relies on market movement itself and attempts to draw conclusions about the present and future without considering fundamentals.
Sometimes fundamentals and technicals are well-aligned. That alignment can be seen in the very shortest of terms such as strong economic data hitting on a day where bonds were already ‘overbought’ and at risk of a bounce. Or it can be seen in the bigger picture such as early June when covid numbers began ramping up just as bonds were decisively ‘oversold.’ Naturally, we assume more significance in these instances where both approaches are in agreement.
There can be agreement within each school of thought as well. For instance, if we’re only focusing on technicals, there are multiple options. If a moving average, stochastic, MACD forest, Fibonacci level, and RSI are all suggesting the same bounce, that would be a stronger technical signal. Same story if several big economic reports make the same suggestion on the same day (i.e. ADP and ISM data coming out staggeringly stronger than expected in early June and kicking off a bit of bond market panic).
This week begins with multiple technical indicators suggesting caution for bonds. I’m only focusing on a few of them in the chart below, but we could easily add more. The gray lines mark the same sideways range we’ve been following since May, the uptrend that’s been in place for just as long, and the downtrend that we began following in just the past 2 weeks. We already talked on Friday about bond yields bouncing on bottom of that down-trend (the teal lines). The risk/significance associated with that bounce is bigger because it coincides with the sideways range as well. Finally, various technical overlays (math applied to recent market movement in an attempt to gain some sort of predictive advantage) also suggest caution, like the reversal in momentum seen in the stochastic oscillator at the bottom of the chart. Long-story short, the technical approach clearly suggests caution.
From one standpoint, the fundamental approach would agree. Economic data is gradually improving. Disregarding Florida, most of the closely-watched states may be seeing some improvement in the recently troubling covid spikes. IF (and that’s a big “if” for a reason we’re about to discuss) that positive trend continues in covid data, there is definitely cause for concern about interest rates’ ability to remain at all-time lows.
The big “yeah but” in my mind is the uncertain impact on the numbers from 4th of July gatherings. Ideally (from a public health standpoint, not a bond market standpoint), these gatherings took place outdoors to a large extent. Nonetheless, most of us know people who got together with family they haven’t seen in a while over the holiday, so there’s much to be learned in the next few days as this would be the week when we’d expect to see the evidence of holiday-induced spike in case counts.
Economic data is fairly light overall, but we do have at least one heavy hitter in the form of Retail Sales on Thursday. If it makes a strong suggestion and if Jobless Claims (which come out at the same moment) make the same suggestion, and if covid numbers are not spiking, the fundamental case for higher rates will be very strong in the short term. That said, many serious longer-term doubts remain, and they can’t be cleared up in one week or one month.