Understanding the directional effects they create is essential for making sense of the markets.
We can think of global capital as a fixed amount of capital—what changes are the stops where it temporarily settles. Nothing in the markets moves in isolation; everything is interconnected through interest rates.
Components of an interest rate:
ꭆ(n)= ꭇeal ꭇate(n) + Expected Inflation(n) + Term Premium(n)
The confusion arises when discussing rates without specifying the time frame in which they apply (n). Whenever we consider a rate change, we need to think about which variable actually shifted. A rise in the real rate is not the same as an increase in inflation expectations, and consequently, market reactions will differ.
The rates we hear daily are nominal rates for a specific period. The Fed rate, for example, can be thought of as the rate at n = 0.
The most popular rates on the yield curve. A quick look.
The three main rates that shape the yield curve peaked at the same time—October 2023. At that moment, something happened in the markets that reshaped the entire yield curve structure.
Why?
Such a synchronized move across all time horizons is unusual. A key event earlier that year was the small bank crisis in March 2023. Could that have been the trigger? Or was it a shift in Fed policy expectations? We don’t know yet.
Ex-post analysis is always valuable. History doesn’t repeat itself, but sometimes it rhymes…
Rates and Intermarket Dynamics.
Rates start to fall (October 23), which initially is good news for stocks. As a result, both stocks and bonds rise. Lower rates mean more credit, higher consumption, increased revenue, and greater profits. That’s how the market initially interprets a rate cut.
However, as time passes and economic expectations shift, so does this interpretation. A recessionary economy is bad for markets, even with low rates.
The difference lies in the formula. When rates fall due to a decline in the real interest rate, it essentially means they are dropping because the economy is contracting. If rates fell due to lower inflation expectations, it would be great news for the market. The same applies if they dropped because the term premium decreased—think of this simply as a reduction in “risk.”
Intermarket analysis signals when these shifts are happening. In October 2023, gold broke out of a long consolidation/accumulation phase and started a rally that continues to this day. The message at that moment was crystal clear—rates were going to fall, and they all did.
Commodities also sent their signal—much earlier! In July 2022, they anticipated the yield curve inversion. By June, they had already peaked, signaling an economic slowdown. They started to decline, expecting weaker demand, precisely because higher rates would contract the economy.
The dollar sent an even clearer message. In July 2022, it peaked and then started to decline—despite rising interest rates. This was yet another strong signal about real economic expectations at the time.
Components of interest rates:
- Real rates
- Inflation expectations
- Term premium
The peak of uncertainty (risk) occurred months before the Fed’s reaction. Since then, it has been declining—fluctuating, but at lower levels.
Two Year Real Rate
This is the key chart. Until April 2024, the market expected short-term economic growth. But from that point onward, for some reason, that expectation faded. The dominant macro narrative shifted, and economic expectations turned negative.
A
The nominal rate peaks while the real rate is rising. The sum of the other two components outweighs the increase in the real rate. Remember that, the real rate reflects market expectations for real economic growth.
B
In May 2024, the real rate peaked, aligning with the other components, causing the nominal rate to start declining.
C
Market expectations for the economy began to shift. Until that point, steady economic growth with rising real rates was the dominant view.
However, after April 2024, the market stopped anticipating real growth and started pricing in an economic slowdown.
That was the moment when the Fed should have cut rates, but given existing inflation levels, it simply couldn’t. As a result, it began damaging future economic expectations. That’s the ex-post reading.
Trading the entry into Stage 4—we are positioning for an economic slowdown.
Cyclical sectors in focus.
We’ve already analyzed and traded the sector. We still have open positions in it.
Extrapolating our Macro and Intermarket analysis to Technical Analysis.
Our view is that a downside breakout would formally mark the beginning of Stage 4 from a Technical Analysis perspective in the bond market.
In the equity market, we’ve already identified the key levels.
Timing
It’s possible that price invalidates our timing by breaking above the critical zone, creating what’s known as a false breakout—it wouldn’t be the first time.
Hypothesis
Our macro and intermarket-based hypothesis is only invalidated if price sets a new all-time high. That would confirm that our thesis was incorrect and that Stage 4 hasn’t begun or was simply overpowered.
Why Do We Expect a Bull Trap?
Because the narrative is just starting—it’s not a full trend yet. Trading a breakout (lower low) increases the stop-loss size, distorting the P/L ratio. We don’t see that as the best strategy for now.
Setups: Vehicles
We are trading two scenarios—related, yet distinct at the same time.
- An economic slowdown. The most exposed assets are typically small-cap growth companies, especially in industries where credit plays a crucial operational role.
- We believe the S&P 500 is overextended. This line of thinking leads us to focus on high-beta stocks relative to the index.
These are clearly congruent scenarios. The key point is that the vehicles vary depending on which version you choose to trade.
In this case, we are trading a leveraged index on this ETF. The analysis remains the same.
When trading an index, the options expand—growth, value, small-cap, mid-cap, or large-cap. It’s crucial to understand what you’re actually trading.
In this case, our strategy is to wait for the index correction through an ETF that holds the companies with higher 𝓑.
This is what we are waiting for. Once again, all this information relates to our trading approach, which we share publicly for marketing purposes. It is not a trading recommendation.
What follows is for the Front Liner subscription. Essentially, we consolidate our weekly work—setups, ideas, ETFs, and anything else we’ve been working on.
This section is intended for traders with knowledge of technical analysis searching for ideas.
Enjoy!
One of our clients needed greater duration in his portfolio. We love this one.
The difference between the three subscription levels (1. Observer, 2. Explorer, 3. Frontliner) lies in the subscriber’s level of interest.
- Observer:
Focuses on theoretical and practical Macro and Intermarket analysis.
- Explorer:
Designed for traders who are already in the markets at an amateur or beginner level.
Added to the Observer level is a first step into the markets—a specific and actionable technical setup derived from the previously mentioned analyses.
Additionally, explorers will have access to theoretical pieces covering all three types of analysis as they are published and applied.
For example, Point and Figure in Technical Analysis.
- Frontliner:
This is for pro traders—those who are in the markets daily.
At this level, we compile our weekly setups, or at least the most interesting ones. It’s useful for gaining new ideas and alternative thought processes, but applied directly to charts.
Some of these setups turned into trades, while others didn’t—for countless reasons, including Compliance Desk restrictions.
Plus Observer and Explorer level.