The Markets In Five Charts

Dear Fellow Traders:

Greetings. I hope your Sunday is off to a great start. As we prepare for tomorrow’s trading session, I wanted to take a step back, highlight a few key stories, and clarify what drives markets.

Let’s take a look…

Chart No. 1: The Money Likes Treasuries

Well, if the U.S. was trying to attract a large number of investors to buy U.S. Treasuries over the last month, mission accomplished. The U.S. has just witnessed the largest inflow into U.S. Treasury funds since the Silicon Valley Bank crisis in 2023.

Historically, such surges represent a shift in investor psychology away from risk-taking and toward capital preservation.

It’s not merely an opportunistic rotation — it is a defensive maneuver, a hedging instinct against tail risks that may not yet be fully reflected in equity prices.

The magnitude of the flow suggests investors are preparing for turbulence, whether from economic slowdown, monetary tightening, or political shocks.

Chart No. 2: Happy, Danger, and Selling Zones

An interesting chart from Syz Group, via TradingView. It suggests that the S&P 500 has various trading zones based on its 50-day, 100-day, and 200-day moving averages.

The analysts consider a break above 5,500 as bullish, caution is required between 5,200 and 5,500, and weakness is noted in the 4,800 to 5,200 range.

For good measure, there’s also the recession zone between 4,400 and 4,800. Trading within this range signals a risk of recession or a major economic slowdown if sustained.

You know what’s not mentioned, though?

Momentum… and the 20-day moving average.

This will ultimately depend on economic conditions, including credit, risk, and leverage, as well as the sustainability of policy changes.

And a key line in the sand - the 20-day moving average.

The S&P 500 is currently 3% above its 20-day moving average. If we break under that level again, nothing good happens.

However, if we sustain and push above the 50-day moving average, it can take us back above 5,500. From there, our focus is on the range of 5,500 to 5,700.

Chart 3: BlackRock’s Warning

Ominous signs will come from the junk bond market.

In recent months, credit spreads have moved higher.

BlackRock warns that ongoing trade tensions could accelerate this widening, pushing spreads to three-year highs. In past cycles, moves of this magnitude have been precursors to economic slowdowns or financial market stress.

Junk spreads are often the first to sniff out problems before equity markets catch on.

In recent months, they have stated that risk is rising and liquidity is starting to fray.

If we return to those late 2022 levels, we could see sentiment shift significantly (see Chart 5), presenting a contrarian opportunity.

Chart 4: The News-Driven Cycles

The relationship between political personnel and market performance is becoming too stark to ignore.

Data show that the S&P 500 has reacted positively on days when Treasury Secretary Scott Bessent receives more extensive media coverage, a figure perceived as relatively market-friendly.

By contrast, mentions of Howard Lutnick or Peter Navarro — both associated with more aggressive, populist economic views — correspond with notably negative market days.

This divergence underscores a growing sensitivity among investors to potential policy shifts, particularly in areas such as trade, regulation, and monetary policy independence.

It also signals that as the election cycle intensifies, volatility linked to headline risk could return in force.

Chart 5: There Seems to Be a Disconnect

The rally that has carried stocks into 2024 has its roots in October 2022, when sentiment among fund managers hit an extreme low of pessimism.

This chart tracks the S&P 500 and the sentiment of the Bank of America Global Managers Survey, which measures sentiment among money managers.

Deep sentiment lows have often marked durable turning points, and this case proved no exception. They even joke about it being a major contrarian signal.

Here’s the thing… they’re wrong about this…

It has nothing to do with sentiment… and everything to do with the expansion in liquidity in the financial system.

The October 2022 period, when everyone was bearish, was the bottom of the most recent liquidity cycle. I remind you of this because liquidity drives markets, and when central banks engage in easing and accommodation, new capital and liquidity find their way into risk assets.

You must follow the drivers of capital within the system. We’ll dive into that tomorrow.

Stay positive.

Garrett Baldwin