Today’s the day!
At 2:00p.m. ET we’ll get the most important Fed decision on interest rates since the last one. Everyone is expecting a 25-basis point cut. The stock market has rallied in anticipation of that cut. And, since Fed Chairman Powell doesn’t like to disappoint Wall Street, we’ll almost certainly get that cut.
Most eyes will be on the stock market following the announcement. It may be more interesting, though, to watch the bond market.
You see, bond traders don’t seem to share the same enthusiasm for rate cuts that stock traders enjoy.
Take a look at this chart of the iShares 20+ Year Treasury Bond ETF (TLT)…
While the stock market has been rallying over the past two weeks in anticipation of the Fed lowering its Fed Funds target rate, Treasury bonds have been selling off. TLT is down 2% in two weeks. It’s down 4% since mid-October. And, today’s rate cut might provide a catalyst for a steeper decline.
Look at the selloff that happened in TLT last December – right after the Fed cut short-term rates by 25 basis points. TLT had been declining going into the announcement on December 18. The selling accelerated on the news.
Today we have a similar setup in TLT – with a slightly more ominous pattern…
The action in TLT over the past few months has created a head-and-shoulders pattern on the chart. This is a bearish pattern that often signals the end of a rally phase and the beginning of a decline phase.
The neckline of the pattern is at about $87.75. That is critical support. If TLT can bounce off this level and rally back above the right shoulder high near $90, then bond traders can breathe easy. A selloff will have been averted… or at least put off for a bit.
On the other hand, if TLT breaks below the neckline, then look out below. TLT will likely be headed towards the next support level down around $83.50.
It’ll be hard for the stock market to rally when the bond market is selling off. After all, the S&P 500 dropped 200 points in the final two weeks of 2024 as Treasury bonds declined.
We might be headed for something similar this year.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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