Title: Time To Start Getting REALLY Bullish? | Tom McClellan
Show: Thoughtful Money (host Adam Taggart)
Guest: Tom McClellan (editor, The McClellan Market Report; McClellan Oscillator / Summation Index)
Also appearing: John Llodra & Mike Preston (New Harbor Financial) — post-interview segment from ~52:52; their views are NOT McClellan's
Date: 2026-09-17 (recorded 2026-09-16, about an hour after the FOMC rate-hike announcement)
URL: https://youtu.be/w-mI47Gec7s
Length: 1:18:51
Note: YouTube auto-transcript pasted by Stephen; fillers (um/uh, "you know" interjections, contentless "like"/"right?") and stutters/false starts removed; wording otherwise verbatim; (mm:ss)/(h:mm:ss) cues kept in place. ">>" marks a speaker change. Auto-transcript garbles fixed: "Mlen/Mlullen/Mlelen/Mlelman/McL"=McClellan, "Tagert"=Taggart, "Axel Murk/Mark"=Axel Merk, "Worsh/War"=Warsh, "Vermacht"=Wehrmacht, "straight hormuz"=Strait of Hormuz, "dennial"=decennial, "breath"=breadth, "Dan steps/dense steps"=dance steps, "caveing"=caveating, "Far bit for me"=Far be it from me, "quartz"=quarts, "Fala money"=Thoughtful Money, "Harour"=Harbor, "Dorsy"=Dorsey (Nasdaq Dorsey Wright), "unonymity"=unanimity, "defay"=defray. "Lodra" rendered as Llodra (spelling unconfirmed). The "S&P 500 8,500 / 9,000" and "quarter basis point" figures are as spoken.

(00:00) So, I am not bullish today, but I am looking for the moment probably within the next week to turn bullish and then I'm going to be bullish as all get out. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. Welcoming you here for a discussion on the latest in market technical analysis with one of the best TA guys out there.
(00:27) Of course, we're talking about Tom McClellan of McClellan Oscillator. Tom, how you doing? >> Doing great, Adam. Great to see you again. >> Great to see you as well. So we are talking, just so the audience knows, we're recording this I think within an hour or so of the latest Federal Reserve news. And folks, I'll be deconstructing that.
(00:49) In fact, by the time you've seen this video with Tom, you've probably seen my live stream with Axel Merk doing a play-by-play deconstruction of everything that the Fed released today. But Tom, these are interesting times and there are few people I know who are able to tease out the whys and the hows of how times are interesting than you.
(01:11) You have all sorts of wonderful charts. We're going to go through a bunch of them. But the correlations that you come up with always just kind of blow my mind. So, anyways, we'll get to the charts quickly, but first, can you just give a sense for the character and the tenor of this market compared to previous market times and cycles you've seen across your long career? >> This is a strong market.
(01:36) We are in the first two years of a presidential term which are supposed to be sideways and the market's doing a very, very upward version of sideways and so if you want an explanation for why that is I would say that we are not taxing Americans to the hilt and we're leaving more money in the economy as opposed to in the government's coffers.
(01:58) That creates problems for the government, but it creates great conditions for the economy because we're not eating our seed corn. And if you leave more money in the hands of people, they go out and spend it and build factories and do things with it other than pay the government.
(02:13) As I said before, it creates problems for the government, but it's great for the stock market. And I see continued great things for the stock market ahead. If you want to jump right into the charts I brought, we can talk about why. >> Well, yeah. Far be it from me to stand in between now and then.
(02:29) So, yeah, why don't you pull up your charts and elucidate all for us. >> I call this my Rapunzel chart and it's basically the way that we construct the presidential cycle pattern. That's the name that technical analysts use for talking about how the stock market has regular repeating four-year patterns of behavior.
(02:52) And so the way you find that out is you chop the market up into four-year chunks of time. You reset them all to the same initial value and then you average them together. So this is what they all look like independently and it looks like a mess. But when you average them together it looks like this. I do it a little bit differently than other people do where I start at November 1st.
(03:13) That's when election time is. And so you can see that for the first couple of years, the market is generally sideways. And then year three is great and year four is also upward, although a little bit iffier because we're heading into election. So we're about to head into year three, which is a wonderful time for the stock market.
(03:32) In fact, it's nearly always up. A couple of times it didn't work that way. One was 1931 when we were in the middle of the Great Depression. Another was 1939 when the Wehrmacht was marching through Poland and he didn't get an up year. So absent conditions like that, you can count on the third year being an up year. Here is what the current stock market is doing compared to that.
(03:56) The scales do not match up and I have the two plots offset so that we can see the correlation and see that it's not just the overall slope from beginning to end. There's correlation of the dance steps along the way, but generally speaking, we're doing a whole lot more upward of a version of sideways than we have done in other years, but we still have this bottoming process in the presidential cycle to get through and we are in the zone for doing that.
(04:26) And then we get to climb the big wall of upwardness in the stock market going into the third year of the presidential term. >> Okay. Hey, a couple quick questions on that. So, it looks like that bottom is generally coincided with the midterm elections. And so is it safe to say in the next couple of weeks you expect some volatility and some market softness? >> We're in the squishy bottoming period right now and actually it bottoms before the midterm election which is in November which is interesting. You would
(04:59) think that the market would wait for the results of the midterm election before deciding what to do. But no, the stock market tends to bottom in late September to early October because that's when investors feel like they have figured out what they think is going to happen in the election.
(05:16) And so they're not so worried about it anymore. And in fact, the stock market right now, the S&P 500 right now is running about a week ahead of the normal schedule. That's why all these alignment lines that I've drawn in here are tilted a little bit because the stock market is making those turns a little bit early.
(05:33) So, we had the top we're supposed to have. It was higher instead of lower, but we're still making the same dance steps. So, we're in this bottoming multiple bottom formation structure right here. And somewhere between now and about a week from now, we should get the last of these bottoms and then we start really climbing.
(05:52) And so along the way as we muddle through this, what you want to look for is you want to look for a day with a high put/call ratio. You want to see a nice high VIX. If I can ask for everything, you want to see breadth divergences starting and especially breadth momentum divergences.
(06:08) So we look for a higher low in the McClellan Oscillator to say, okay, we're getting the conditions. It's time to get on board to climb this. But you don't want to be too late in waiting for the last of these bottoming conditions because we're going to be starting higher and there's been nice correlation of the dance steps.
(06:25) Not generally of the overall slope, but of the dance steps where there's been a disruption of the overall slope is where you have these anomalies like going to war with Iran or having the Strait of Hormuz open and everything's fine. Those were not part of the normal program and so you cause brief anomalies that change the slope; the dance steps are still there, which is fascinating that it works that way.
(06:48) >> Okay. So it sounds like, and we'll give you a chance to give as much nuance in the rest of the discussion as you want to give, but sounds like you're actually generally pretty optimistic about the direction of the market starting pretty soon. Can you go back to the previous slide for a second? I just have two questions for you.
(07:05) One is this presidential cycle pattern says, hey, as the midterm elections get resolved, the market tends to have a really strong following year, right? And of course, the debate leading up to the midterm elections is, well, is the party that's in favor, are they going to lose the midterms and is Congress going to go away from the administration? That's all taken into account historically in this cycle, right? So, I'm assuming in your mind it doesn't really matter so
(07:33) much what happens in the midterm elections, just as long as they're over and there's certainty delivered to the market. Is that true? >> That's exactly right. The actual outcome of the election matters way far less than the certainty of knowing that we have an outcome. People don't care.
(07:52) Investors don't care what the outcome is. They just want to know that we have one. And so once they feel like they know that we're going to have an outcome that is going to be certain to them, then they start buying and that's why the bottom is about a month before the election which is fascinating. You'd think that it would be after the election but it doesn't work that way.
(08:10) >> Okay, great. And then second question is, right now you said we're following the dance steps you would expect to see although there have been some variations and obviously the exogenous stuff like the wars. >> Yeah, that's just stuff coming out of the blue surprising the markets. >> When you say that we're stronger than normal right now, does that in any way make you think that the following year may not be as strong as the historical pattern average just because we're maybe pulling some of
(08:46) that value into today? >> That's an excellent question. You got to figure that since the presidential cycle pattern is an average pattern of all the four-year terms, half of the time we're going to be better, half the time we're going to be worse. And so, it's really hard to characterize it because we don't have a sample size of 50 or 60 iterations.
(09:12) We've only got a handful since the '30s when we changed the 20th Amendment and changed the political calendar. And so if you try to squeeze too many nuanced insights out of it, you start running into trouble. But generally speaking, strength tends to continue. We don't have signs of weakness showing up.
(09:28) We just have signs of the normal seasonality like we're supposed to have. >> Okay. All right. So very, very high level, at least looking through this TA type of lens, it sort of seems like markets have a green light. But I know you have a lot of other data here, so let me let you run. >> Yeah.
(09:47) Now, since we're talking about average patterns, the four-year presidential cycle pattern is one of those. The 10-year decennial pattern is another one that's been talked about since the '30s. And it's still working. You basically average the market together in 10-year chunks of time. And in this case, I'm using the Dow instead of the S&P 500.
(10:07) And the correlation's been pretty good except for when we had the Iran war that disrupted the correlation. But once people felt like, oh, okay, we've got that figured out, it went back to following the normal dance steps. This again is a more upward version of sideways than the average. But this shows a bottom in early October.
(10:27) We're in this bottoming process. That fits very well with what the Dow's actually doing, that fits with that pattern. And then we get to the year seven effect, which is a bullish effect except for 1987. Year sevens have had some problems in the last century or so, but that's usually later in the year, but the first part of years ending in seven are very bullish and that actually starts in October.
(10:56) So, I am not bullish today, but I am looking for the moment probably within the next week to turn bullish and then I'm going to be bullish as all get out. >> Okay. Bullish as all get out. Okay, I like that. So, let's see where to go from here. Let me just ask you this question because it might strike people the way it kind of strikes me when you say years that end in seven tend to be pretty bullish. I think that's what you said.
(11:21) >> Yeah. >> Talk to the person who says come on Tom that sounds like astrology, right? >> I agree. Totally agree. That's a screwy idea that it should matter. And so since the hypothesis that I was operating under is that it's a screwy idea it shouldn't matter, I gathered the data just to make sure and I refuted the hypothesis.
(11:43) It's not such a bad idea because there is reliable similarity that we see from decade to decade in terms of how they show up. Part of it owes to the four-year cycle pattern because years that end in six like we're in right now, half the time that's the second year of a presidential term, which is a sideways period.
(12:04) And so you're seeing that effect counted twice in the two different versions of it. It shouldn't matter but it does. We are creatures of habit and the seasonal factors of an annual cycle versus a decade and versus four, they all do seem to matter. They shouldn't but they do. >> Okay.
(12:22) And folks, this is somewhat of what I was referring to at the start where Tom teases out in his charts all these amazing kind of correlations that just do not seem intuitive, but you can't argue with the data that they exist. And so Tom, I'm sure you've got some more of those hidden in here. And I don't know if you're going to talk at all about your oil and gold correlation charts with the markets, but >> saving that for last.
(12:43) But I want to talk some more about the stock market. But one of the things that we have going on right now, we have the advance-decline line has been fairly strong. We have no divergence between the advance-decline line and stock prices. The advance-decline line was making tops when stock prices were making tops. That's a bullish condition.
(13:01) When you have a strong advance-decline line, it says that there's enough liquidity around that even the lowly stocks, which all get the same vote in the advance-decline statistics, that even the lowly stocks can get some of that liquidity. When you have a new all-time high or even a new three-year high in the advance-decline line, that is a very positive factor.
(13:22) In fact, I think I brought a chart. Yeah, this is a study I started years ago and I've kept it up. It asks the question, suppose you have a three-year high in the New York Stock Exchange advance-decline line. What's the worst case drawdown over the next three months going forward from that moment? How bad can it be? And the answer typically is about 10% is the worst you see.
(13:44) That's where the dashed line is. I've drawn in at 10%. And that's about as bad as it gets after one of these conditions where you have a new three-year high in the line. The big exceptions are of course COVID. COVID broke a lot of things, broke a lot of charts. Also, when the Fed suddenly ended QE1, we got a big dip.
(14:06) When the Fed suddenly ended QE2, we got another big dip. So, if the Fed is going to do something sudden and drastic or if we're going to have a pandemic, then yeah, the 10% level can be broken. But generally speaking, the worst case you get after one of these new A-D highs is about a 10% decline. So, that's a nice thing to know. >> Yeah.
(14:23) Yeah. And sorry to interject, but that 10%, that's not an average. That's a maximum, right? It seems like the average is 4% or something like that. >> That's what these bars reflect. Yeah. So the worst case is about 10% is the worst it's going to be, except for these >> barring a black swan more or less. >> Yes.
(14:43) Those are true black swan events. Yes. I don't think we have that coming and so we can figure that we're not going to see too bad of a drawdown. >> Okay. All right. So, I'm going to ask you this question at the end after you've gone through all this stuff, but when you said in the immediate term, you're looking for a reason to flip bullish, right? That we've fully bottomed out and that we're starting the beginning of the next 12-month upcycle.
(15:09) But then you said you're going to be as bullish as all get out. And so, I'm just preparing you. I'm going to ask you to expound on the all get out part of it. What is the story your charts are telling you to make you want to be really bullish? >> I will promise to get to that. >> Great. >> But first I got to do a little bit of caveating, saying that we're not uniform in terms of strong breadth everywhere; where the breadth numbers are weak and where I'm concerned is in the corporate high-yield
(15:37) bond market. I keep a daily advance-decline line for those data as well and they are very useful because these corporate high-yield bonds trade much more like stocks than they do like T-bonds and they draw from the same liquidity pool as the stock market does. When you see a divergence between this advance-decline line and prices, it's a sign of trouble.
(16:00) We've been operating under a divergence between the two of them for all of 2026 and I keep waiting for that to matter and it just doesn't. The past ones that I've shown in this chart, they've mattered in a decent way. 2022 was when it mattered a whole lot. >> And so this is not good news, but this can get better.
(16:26) If corporate high-yield bonds suddenly start doing better, then we can rehabilitate this divergence and start doing well. One thing I notice is that you see how steep the recent dip is and that's a very vertical acceleration. We look at acceleration in advance-decline statistics using the tools that my parents developed, the McClellan Oscillator and the Summation Index.
(16:45) And so I keep a McClellan Oscillator on this advance-decline line where we're seeing the same divergence zoomed in. This is the McClellan Oscillator for that corporate high-yield bond A-D line and it's way the heck down there. It's saying we are wringing out probably the worst of it.
(17:05) You usually get the lowest point in advance of the lowest price low. You did that here in March. You get the lowest point in advance of the price low a little bit later. So we're having the worst point now. So that's why I'm thinking that the final price low is probably within a week or so from us and then we start going higher.
(17:24) >> Okay. So you think this will be relatively short-lived in terms of its potential to influence stocks. Do me a favor real quick. Just go back to the first chart you showed with the divergences. Yeah. Right there. If I remember correctly, if I've taken good notes from my previous Tom McClellan interviews, you are always looking for negative divergences, right? And that's what you would call this, right? A negative divergence.
(17:50) >> I'd call this a bearish divergence. If you're in an uptrend, which we are, except for a small seasonal pullback that we're doing right now, but generally speaking this is a lower-left to upper-right kind of chart. Anytime you're in an uptrend, you look for reasons.
(18:06) Why is the uptrend going to end? And if you've got no divergence, then that's a good thing. If you have a divergence, that's a reason that the uptrend could end. And this is one of a big concern and it's been bothering me all year. But we're reaching the point where the bearish seasonality time window is ending.
(18:26) And so if this is going to get anything done, it's got about a week left to get whatever done it's going to get done. And then we run out of time and we're transitioning into a new bullish time window. >> Okay. So, forgive me if these are naive questions, but they're the ones that come to mind. Because this is the corporate high-yield bond line.
(18:47) I imagine that that asset class gets pretty impacted by rising bond yields, especially when a lot of these companies are finally having to start rolling over their debt at these higher interest rates. So, is there an argument to be made for as long as bond yields keep rising, there's going to be downward pressure here, or do you look at your oscillator and say, "No, but looks like this thing's pretty much played out."
(19:14) >> More like the second one of your choices. You would think that these would be interest-rate sensitive, but they're way more sensitive to the stock market liquidity than they are to what other interest rates are doing. That's just one of those hypotheses that you got to check. These are horrible investments.
(19:31) Corporate high-yield bonds. They're junk bonds. They are horrible investments. They don't deserve your money. And that's why they have to pay such a high yield in order to attract some money. They only do well when there's so much money sloshing around that everything can get a little bit of it. When the liquidity starts to dry up, these horrible investments are often the ones that show that pain first.
(19:56) And they've been showing that pain all during 2026 saying liquidity is having a problem. I think that liquidity is going to get better and is going to start doing well. It hasn't been really affecting the stock market that much. The pain has been confined here in the corporate high-yield bond market. I think it's going to start getting better and so this will be one of the confirming signs I'll be looking for as we get into October and November, is looking for junk bonds to start doing better, which will say hey there's gobs
(20:24) of money, even the crappy investments can do well. >> Okay so you think liquidity is going to win out. All right, sorry, thanks for that side quest but just useful. >> So let me jump to something else that's really important right now that has been getting a lot of attention. This is margin debt. >> Or more appropriately the debt balances in margin accounts as tracked by FINRA.
(20:48) They publish this data every month and it's been out since 1997 and it's way the heck up there. Whole lot of margin debt, which has been a problem in the past when too much borrowing to fuel stock purchases is getting out of control. People start to get worried because this is just going parabolic and I've shown it intentionally on an arithmetic scale just to make it look more alarming.
(21:16) It looks worse than it maybe is. And so if we normalize it by comparing it to GDP, then it doesn't look quite so scary, but it still looks pretty scary. >> That's still pretty scary. I mean, that's higher than it's ever been in this data set. >> This is that same margin debt just divided by GDP. So, it's not quite so parabolic, but it's higher than it's ever been, at least since 1997.
(21:39) And whenever you get a big peak like this, it coincides with important stock market tops. >> Uh-huh. >> In fact, the peak tends to occur before the stock market top. And that's really important. But there's something else I want people to do. I want everyone who's looking at this to mentally do a little bit of math in your head and look at the period between these peaks in this margin debt versus GDP. It's about seven years.
(22:08) >> There's a very reliable seven-year cycle in market tops that goes back a long ways, more than just the data that FINRA has in this data back to 1997. And so counting forward from the last peak of this series in August of 2021, counting forward about seven years, that gets us to about 2028 and we're in 2026.
(22:35) So even though this is really high and concerning because it's high, we're not yet at the seven-year cycle point for this to be topping out. So I think we have a little bit more room. >> All right. So our astrology tells us we still got a year and a half until we really have to worry about this. And I'm sorry to be tongue-in-cheek about astrology, but it's these tight correlations that you've unearthed.
(22:54) Yeah. >> Well, and if it was astrology, then you could point to some planet with a seven-year orbital period, but there isn't a good one to point to. So, we can dismiss the planetary aspect. I don't know why seven years matters except that people get frenzied at tops and then they get discouraged and it takes them a while to decide to get frenzied again.
(23:14) And humans tend to operate on a cycle of about seven years. That's the best explanation I have. >> Wow. Okay. But this same cycle, there's other data. This is data that FRED, the St. Louis Fed, has. And this is not as good a data because it's only quarterly instead of monthly that FINRA has. But this one goes back to 1945. And you see this same seven-year cycle showing up in these data and in prices going all the way back to the early '70s.
(23:41) So it's a pretty regular thing. It's not precisely 7.0 years. It's 7-ish. And so I can't tell you exactly when the top is going to come just based on this because it's not precise enough. But I can tell you that five is not seven and we are five years from the last of these peaks.
(24:03) And so somewhere out in 2028 is when we should expect the seven-year type top to arrive. >> Okay. So sounds like this is going to be a bullish as all get out interview. But you're marking that at some point you may come back on in a year or so and deliver the bearish as all get out one. >> I promise I will if we start seeing the bearish signs again, but there's a lot of bullish to get through.
(24:25) There's one concern though and the one way that this could get screwed up is involving the Fed and quantitative easing. Some of your viewers hopefully know that we are in a period of quantitative easing right now. And by my count we are in QE5. The first one was all the way back in 2009.
(24:44) And every time we've had them, they've been invariably bullish. But when Warsh took over, without saying anything, the slope has changed. We were in a much steeper slope before Warsh took over in terms of the increases in the total Treasuries and mortgage-backed securities. They're selling off some of the mortgage-backed securities now, but they're more than making up for that by buying Treasuries.
(25:09) Except that without saying anything, he didn't announce anything about QE, but it's noticeable that the slope has changed and now it's changed even more with the latest data. And so if we get into full-blown quantitative tightening, which they didn't talk about in the most recent FOMC announcement, I don't remember hearing anything about quantitative tightening.
(25:29) I think they're just doing this very quietly. If they start yanking money out of the banking system, it would be a fly in the ointment, but we haven't heard anything for sure but >> okay, although I do want to say that Warsh in his consideration as Fed chair and then I think early afterwards has said look I don't really plan to be monkeying around with the balance sheet and in fact I think it should be lowered over time, I'm going to really focus on using interest rates as my main policy measure. So maybe this is
(25:59) a consistent sign with what somebody with that mindset might be doing. We're just going to slow the acceleration and then eventually we'll start tightening, but who knows? >> Without talking about it. Yeah. So, this is one of the reasons you got to not just watch the press conference, you got to look at the data.
(26:15) >> Mhm. >> And that's what I do. One place where QE is bad is the bond market. You would think that having the Fed decide to step in and buy more bonds, that would create more demand for bonds and it would be bullish for bond prices. The exact opposite occurs. Every time you have QE like we had back in 2009, the bond market tanks and we had QE2 in 2011, the bond market tanked.
(26:45) We had QE3 in 2012 and '13, the bond market tanked. We had QE4 after COVID, the bond market tanked. When they stopped doing QE, we hit a low in the bond market and bond prices started going sideways until we started QE5 again and the bond market has been tanking. So, bonds have been doing poorly during this period of QE.
(27:05) It's been a very gentle QE round this time compared to some other ones, but it's not been bullish for bonds. So, I'm bearish on bonds right now for a lot of reasons, and I can talk about that a little bit more later, but if we do end QE5 and transition to even quantitative tightening, that would be an other-than-bearish factor for the bond market.
(27:31) >> Okay. All right. And just to be super clear, if we were to resort to QT4, that would turn you into a bear, a bull, a bond bull. Correct? >> Not necessarily, because there's other factors that I think are more important, but that could mitigate those other bearish factors quite a bit. Why this works this way,
(27:50) this is very counterintuitive. It shouldn't work this way, but we've got a lot of data that says it does work this way. And so, at some point, you got to stop arguing with how it should work and realize how it does work. >> Got it. Okay. All right. So, what else is in the grab bag here? I see oil.
(28:04) >> Oil. Oil and interest rates. They are joined at the hip right now. And this is not news. I'm not breaking news right now, but it's worth seeing it on a chart to realize how much of an effect it is. The 10-year's been zooming up. Crude oil prices have been zooming up.
(28:25) This is data current through Tuesday the 15th. So it may not reflect anything that might have happened on Wednesday with crude oil price down a little bit. But you can see that there is this relationship. What's interesting though is crude oil prices are not yet up to a higher high than they were at the peak in March, but interest rates are.
(28:47) I explain this by saying, well, when we were making this peak in crude oil prices, that was ridiculous. Nobody thought that was going to last and it's all going to come back down. But now people are taking this renewed spike up much more seriously than they took that initial one, and they're thinking that this matters a whole lot more.
(29:06) How this comes into play for me in a predictive way is that gold prices give us about a 20-month leading indication for what interest rates are going to do. So the upper plot is gold prices and I've shifted that plot forward by 20 and a half months in the chart to reveal that all the dance steps in gold get echoed in bond yields about 20 and a half months later.
(29:32) It's not always exactly 20 and a half months. Sometimes the lines are slanted to get the alignment of the dance steps, but we have this sideways period that interest rates are supposed to be in and then toward the end of this year we get the really steep advance in interest rates to match the steep advance in gold prices 20 months before.
(29:51) >> Oh, so folks that remember how violently gold moved at the end of last year and into the beginning of this year, you're basically saying we should expect a violent run-up like that in Treasury yields in the next 14 months. >> Yes. And now what I am not saying, from this equivalent point where we are right now in gold's plot, gold went on to double.
(30:18) I am not saying that that means interest rates are going to numerically double. It doesn't work that way. But the direction of the travel and the timing of the turns does match up. And so I don't really care how far interest rates rise in the long term. I just want to know what direction they're going to go because that tells me how to position myself.
(30:38) >> Okay. I'm going to ask you a macro question here. First off though, this Treasury yield index, is that the 30-year? >> That's the current yield to maturity on the most recently issued series of 30-year Treasury bonds. >> Okay. Got it. All right. So, you've said it's the direction of travel. It's not the magnitude.
(30:59) But let's just guesstimate here for a moment. Let's say the 30-year cracks 6% following gold's path here. And the 10-year is, I don't know, 5.5% or something like that. I know you're much more of a charts guy, but do you have a sense of whether you think the economy can handle bond yields that high? >> First of all, I don't dispute those numbers.
(31:26) Those sound reasonable to get there from here. >> Mhm. >> And second of all, anybody wanting to buy a house is going to be in the most misery based on those, because that's where the long-term rates affect things way more than in business and in corporate expansion and in capex and those kinds of things. Those are much more tied to shorter-term interest rates.
(31:46) It's in the mortgage market that the 10-year and the 30-year matter. And so that's where you're going to see the most pain. And I'm sorry to be the bearer of bad tidings to all the real estate agents out there and all the new young first-time home buyers. I bought my first house at 13%. So I know what you're going through.
(32:02) And it's not going to be fun. >> Well, Tom, I'm going to do you a favor here and I'm going to tell you exactly when the max pain moment's going to be for yields, which is going to be next summer. So, summer of 2027. And I know that with absolute certainty because I, as you may have heard, have just become a first-time homeowner, first time in my long 55-year life.
(32:23) And the house is being built. And so we don't actually assume the mortgage until the house is handed over to us, which is going to be summer of 2027. So >> construction. >> that is going to be the max pain moment. >> Yeah, that makes sense. Yeah, it really does. But this same 20-month leading indication for interest rates, it also works in gold prices with oil prices.
(32:48) This is the same time-offset practice that I was doing before. This one uses a 19.8-month offset just because with oil prices that's worked better historically. And this is a really long chart. This goes back all the way to 2014 to see that all the dance steps you get in gold, you get those same dance steps in crude oil prices.
(33:07) And that this up move that we're seeing now is right on schedule coming out of this little consolidation in gold prices. So oil prices according to gold still have a lot further to go. Now you can have things like COVID come along that bend the curve a little bit, or the Russia-Ukraine war came along and bent it higher, or the Iran war got gains a little bit pulled forward but then we gave them back.
(33:30) So you're going to have events like that that will disrupt it but the general trend, sorry to say if you're a Winnebago owner, the general trend is going to be toward higher crude oil prices. We can get used to that. It sucks. It's awful but we've gotten used to higher oil prices before. We'll just have to learn to drive smaller cars or drive less or not get DoorDash deliveries or bundle up with grocery deliveries because those are all using expensive diesel fuel.
(33:56) It won't be fun, but that's what the message is from gold prices. >> All right. Well, you're just a ray of sunshine today on a number of issues. So, if you're not enjoying what's happening with oil prices, you're saying sorry folks, for the foreseeable future, the beatings are going to continue.
(34:14) Let me ask you this about gold. And gold is an asset that a lot of people who watch this video are pretty invested in. Literally, a lot of them are gold owners. For oil to retreat back and perhaps for the market to correct according to some of the previous correlations you showed, does that mean that gold has to correct in advance first or can gold go sideways? >> Well, oil prices and interest rates are going to follow the path of what gold was doing 20 months before.
(34:46) So, whatever gold does today, that'll matter for oil prices, but not until 20 months from now. >> There is a little bit of feedback in that relationship where what oil does matters to gold today. There's a little bit of that feedback, but the longer-term feedback is much more important than the short-term feedback.
(35:08) And so I'm expecting, as you may recall, gold topped in January of 2026. So if you count forward 20 months from that you get about August of 2028. Should be the peak for interest rates and peak for oil prices. >> Oil prices. Okay. >> Is that when you were going to get your mortgage on your house done, August 2028?
(35:33) >> No. No. >> Hopefully it won't take that long, Adam. >> Yeah. No, no, it's 2027. So at least I can refinance after that peak. Okay. And so the spirit of my question, which I think you kind of answered, but is, yes. So we know we have a pretty sharp decline in gold that's now working its way through the following 20 months to then get reflected in oil and in interest rates.
(36:00) When I look at something like oil that kind of historically hangs out in the $60 to $70 a barrel average, >> my question is, is this more of a direction of change rather than a magnitude? In other words, over the next decade, let's say, can oil be volatile but still deliver an average price of 60 to 70 a barrel while gold may still continue increasing up to 5,000, 6,000, 7,000 an ounce? >> Perhaps.
(36:34) And the one question I have is that that big rise in gold prices was done not so much by normal investors who are in the gold market, but by central banks deciding that they needed to weigh in, especially China. And so does that diminish the message? That's a question that keeps me up at night and I wish I had a perfect answer.
(36:54) What I can say is that the players who are in the oil market are expecting higher oil prices for longer. And one way I know that is I look at the Commitment of Traders report data. This is the net position of the commercial traders in crude oil futures and right now they are net short just like they have been continuously net short since 2009.
(37:19) The important thing to understand is who and what is a commercial. A commercial trader in futures is one who produces or who uses the subject commodity in their trade or business. So, a lot of the commercials, especially in crude oil, are oil producers. Some guy owns an oil well and he wants to lock in the pricing on his production going months out.
(37:42) So, he will use the futures market to do that. And when you see them get up to a really high net short position, that tells you you're at a topping condition for prices. When they get to a low net short position, you're at a bottoming condition. They're saying, "No, I don't want to lock in at this price, but I want to lock in this price."
(37:59) And that's what the numbers are saying. When we had the initial spike on the Iran war, they got up to a really high net short position. They were saying, "I want to lock in these prices." And of course, prices backed off and they backed off in their positioning. Got back to a nice low net short position.
(38:18) What's happening now is we're seeing oil prices back above 100. And these guys are a little bit more timid. They don't want to get short yet. They don't want to lock in these prices. They were willing to lock in those prices back here and had a high net short position. Now they don't want to do it. Which says these experts know something.
(38:38) They are thinking I'm going to sit on my hands and wait for even higher prices before I start locking in. So that's another confirmation that oil prices have higher to go. >> So Tom, give me a number that wouldn't surprise you to where oil could go in the next couple months. >> I hate thinking in price-level terms because there's other factors that come along and do that.
(39:01) I wouldn't be surprised though if we start changing the units, because if we're having trouble charging the right price for diesel fuel because the pumps won't go higher than $9.99, well, then we just need to change the pumps to reflect quarts or liters and then that'll solve that problem.
(39:21) So any number I give you may be subject to change due to rejiggering of the units. >> Okay. And I don't want to put you on the spot here, but I was just trying to get a sense, not as a prediction, but just as a sense of given how much room to run there still may be here. I mean, obviously if you look at the gold chart, it looks like there's an awful lot more to run given what gold's 20-and-a-half-month example has shown us.
(39:48) Are we talking 10 or 20 bucks a barrel? Are we talking $100 a barrel that could be tacked on? Trying to get that. >> There's longer to run, which may or may not be the same thing as more to run in terms of price distance. >> Yeah. >> So, the uptrend is due to last until 2028 if we're going to perfectly echo gold prices.
(40:13) But even with an uptrend, you overshoot and pull back and overshoot and pull back. And so if I try to give you a number and a date, it would be a fool's errand to try to do that. >> Okay. No, no worries. But what I am taking away from what you're saying both for oil prices and for interest rates is it looks like higher for longer is the bet to make.
(40:32) >> Sadly, yes. And I say that as an F-150 driver. >> Okay. Okay. Moving on a little bit. >> But that's the last of what I got. If anybody wants to find out more about these charts, which feature regularly in our newsletter and our daily edition, you can go to our website. You can sign up for free for our weekly Chart In Focus or you can pay to get the good stuff.
(40:55) But I can go back over any of these charts that you have. Any other questions, Adam, if we got a little bit of time left? >> We do. And folks, highly recommend you check out McClellan Oscillator. I don't need to give you the song and dance. You've just seen a lot of the goods that Tom delivers regularly to his audience there.
(41:14) And I love that you anticipate a number of the questions I'm going to ask Tom. You make my job really easy. So, thank you for that. And the only thing I'll say about this that Tom hasn't said yet this video, but we've gotten to it in more depth in ones in the past, is this is something that not just Tom, but his family has been involved in this type of analysis for basically two full careers at this point in time.
(41:42) So this is a technical approach that has been honed over many decades. So when you're looking for something that's really stood the test of time, well, I can't give enough recommendations to check out Tom's work here. >> I'm glad you mentioned that. And I want to mention that my father, Sherman McClellan, is 92 years old, still driving, still working with me every day, contributing to the newsletter and enjoying it because this is what he's wanted to do all his life.
(42:08) He did other things and other careers, but he really wanted to do stock market analysis. He and my mom developed the McClellan Oscillator back in 1969 with no computers. They did all their computations on ledgers. And I still remember it was about three or four years after that my dad got his first electronic calculator that ran on four C-cell batteries, which was great.
(42:31) And you could add, subtract, multiply and divide. And that made the process of tabulating all the numbers and plotting them on graph paper a whole lot easier. So we've come a long way. But my dad is still turned on by analyzing the stock market. Still doing great things and still I get the benefit of learning from him little tidbits that he's picked up over the years.
(42:52) He'll try it out every once in a while, patterns that he sees that I missed. And so I'm very privileged in that regard. >> That is just amazing. Well, please give your dad a huge kudos and thanks and hi from the Thoughtful Money audience, and your mother. That story about the calculator that got powered by four C batteries, which is amazing.
(43:12) I mean they're powered now by these just teeny tiny little disc-shaped batteries. But your mother was very accomplished, but she basically kind of daily did the hand calculations and then chart creations based off your father's work, and then that was what the news report showed in the business hour.
(43:33) Correct? >> That's true. My mother was a math major and so she was a whiz at doing calculations just in her head. She could just do it and make the computations easier. And this was really my dad's joy, but it took both of them to pull it off because my dad was the business and econ guy.
(43:51) My mom was the math whiz. And without those two talents combined in a couple willing to work on it, you couldn't have done this in 1969 without computers. Now it's easy and you get chart server, you can pull up stockcharts.com and get it handed to you in 3 seconds. We are spoiled. They had to do it all in pencils and ledgers and graph paper if they wanted to see it.
(44:12) So >> that's amazing. But they're the generation that all the moonshot calculations came from as well. So, that's just amazing to still be leveraging that and to still have one of the participants be active in the business with your dad here at 92. Tom, I'm just curious.
(44:30) Is there a next generation of McClellan coming up to pass the torch to here? >> I have two kids and one grandchild. Both my kids are doing great in other types of careers. So I don't know who is going to pick up the baton, but I have had thousands of subscribers and even more than that on Twitter, people who see my work.
(44:52) So the work will go on in other ways by successive generations of people. And so that's kind of gratifying to know that something I noticed and something that I built could get picked up and be liked by people. And so that's kind of fun. >> Well, that's amazing. And look, Tom, hopefully you've still got 40 years left in you just like your dad.
(45:10) But if you ever get to a point where, I know you have your audience of subscribers who are your most passionate followers, but if you ever get to the point for an open casting call where you want somebody whose life passion would be stepping into that role, let us know and we'll announce it here on Thoughtful Money, but hopefully that's not for many decades from now.
(45:28) >> I'll think about that one. >> Okay. All right. Well, look, in our last couple minutes here, let me get back to that question I teased earlier. So, I understand the reasons why you are an anticipatory bull here, right? In the very short term, you're looking for the market signals over the next week or two that may tell you that this bottoming process is over and that it's kind of game on for the next 12 months.
(45:58) I get the bullish part. Why bullish as all get out? >> Because the negatives that are counterarguments to the bullish argument start falling by the wayside. >> The divergence that you were showing us earlier, the oscillator shows it's almost played out, that type of thing. >> Yeah.
(46:21) The high-yield bond is the one thorn in the argument. There's still weakness there. That could get resolved and then you stop having that argument. Seasonality is weak right now for another week and a half or at most; that goes by the wayside and we transition to bullish seasonality. We already have strong breadth in the advance-decline numbers.
(46:44) We have low taxation in terms of percent of GDP that the federal government is taking. That's bullish. We have the bullish third-year effect. We have the Fed not getting too stupid yet. We do have problems from oil and from bonds. Those are negative. But the third-year effect in the presidential cycle is a super bullish time to be in the stock market.
(47:08) When you have something that always works, it's really hard to argue against it. And so if you think that no, it's going to be different this time, well, you're betting against a lot of history in thinking that the third year of a presidential term in office is going to be a bad time.
(47:26) >> Yeah. I'm thinking about your Rapunzel chart. There were very few years that were actually negative, >> right? It's 1939 in World War II, since the 20th Amendment changed the political calendar. That's the only time. And so unless we're going to have a condition like that, which seems like we're trying to have a condition like that in the whole Persian Gulf and the whole Middle East, there's a lot stewing, but hopefully smarter heads will keep us
(47:55) from getting into the whole world blowing up. And if that does happen, then we'll be spending even more money, and deficit spending is a bullish factor. If Congress ever decides to rein in its spending and have a balanced budget, that would be a big bearish factor. I don't see that happening anytime soon.
(48:15) It needs to happen. I wish it would happen, but I don't see it happening. >> And bearish mostly because it would be removing liquidity. >> It would. Yeah, it would be taking money out that is doing things to lift stock prices. Spending on the credit card makes for a great party.
(48:31) It's when you have to pay it back, that's not so good. And that's what Congress keeps doing. >> Well, I was just listening today about the tremendous number of regular Americans that are now starting to put more and more of their everyday purchases on buy now pay later. So maybe the government still has one more phase of forgetting about issuing Treasury bills.
(48:56) They just put it on a buy now pay later plan. >> Well, and that's part of the margin debt party that I was talking about, which keeps increasing until it reaches a breaking point, but that breaking point is not due until 2028. >> And so we have, simultaneously, 2028 is when the seven-year cycle for the stock market and for margin debt shows up.
(49:18) We have 2028 as when crude oil prices and interest rates are due to top out. It's going to be very interesting. And I hate to be whoever gets elected president in 2028 because you're going to be suffering from the downside of the margin debt collapse in your first year in office in 2029. That's going to be a bummer for whoever that guy is or whoever that gal is.
(49:39) And it won't be their fault. It'll just be these market cycles that they're going up against. >> Okay. Super interesting. Well Tom, thank you so much for coming on here. I've already earmarked to get you on again in our regular cadence of having you appear in this channel, but let me ask you, as I do every time as well, it sounds like you feel like you have a pretty solid sense of what's going to happen in the near term if your charts prove out to be right. But if anything
(50:07) happens that you think impacts those correlations and might change them in some sort of black-swanish way, right? Maybe it's the war, maybe it's something else, you've got an open invitation to come back on here and tell this audience, obviously after you've told your paying subscribers first. >> Roger that. I'd be happy to do that.
(50:27) >> All right. Thanks so much, Tom. Again, fantastic delivery. You always leave it on the playing field. I really appreciate that. Look forward to having you back on again soon. >> Good luck with the new house. And the advice I would give you is the advice I got from my uncle when I was getting married.
(50:43) I said, "You've been married 28 years, uncle, and you seem happy with it. What's your secret?" And he said, "Well, when my wife and I got married, we agreed on one thing, that she would handle the small decisions and that she would turn to me to handle the big decisions."
(51:00) And he says, "And that's worked out pretty well." And so I asked him, "Well, who decides what is a big decision?" And he said, "Well, she does." And I said, "Well, what's an example of a big decision?" He says, "I'll let you know when we have one." So trust your wife. She's going to know what you want in your house better than you're going to want it, and it'll turn out better if you say, "Yes, dear. Let's do it that way."
(51:20) >> Thank you. I very much appreciate that. And I will just for the audience's sake, I have largely followed that path so far. There have been one or two parts of the house where I've said, "Hey, look, this is where I really have strong opinions," and basically my recording studio, the office that we're going to use for me to record the studio.
(51:40) But everything else, I've just basically deferred to her and said, "Look, you're going to care much more about this and probably know how to use the space much better than I. So, I'm just here to tell you what we can afford and what we can't. And other than that, you just tell us what we're doing." >> And she'll probably pick colors that go well together.
(51:57) I can't do that to save my life. I can see colors, but if you want me to match wallpaper and a carpet, I can't do that. So, my wife is in charge of all color decisions. I'm in charge of spiders and light bulbs, and it works out well. >> And to be honest, that's pretty much my purview now, too. I will say with these new homes, some of the rooms are pretty tall and the light bulb thing has become a lot more existential.
(52:22) You got to really get up there on a tall ladder to replace some of these light bulbs now. It's not as easy as it was back in our parents' day. >> Hopefully you get the kind that last forever, at least according to the label. >> Yeah, hopefully. And hopefully my wife doesn't do the math and realize what the life insurance payout might be and just want to be there to kick the ladder out from under me. So, we'll see.
(52:44) But thanks so much, Tom, and again, really look forward to having you on soon. >> It's a pleasure, Adam. >> All right. Well, now is the time in the channel where we bring in the lead partners from New Harbor Financial, one of the endorsed financial advisory firms by Thoughtful Money.
(52:58) [New Harbor Financial segment — John Llodra & Mike Preston; McClellan is not present from here on.] I'm pleased to be joined this week as usual by lead partners John Llodra and Mike Preston. Gentlemen, thanks so much for joining us. Mike, why don't we start with you? Any key takeaways you feel worth commenting on from the conversation there with Tom? >> Sure. Hi, Adam. That was a good talk with Tom McClellan.
(53:14) We've been following his newsletter on and off for a lot of years. We're not a current subscriber, but we know of his work. We've got clients that mention his work and he's been around and his parents have been around doing this work for so long. We've got a lot of respect for him. And he said bullish as all get out.
(53:33) I think that in general encapsulates what he talked about, not just in stocks, but in other things that we'll talk about like oil, but bullish as all get out. And why? The government's been running a huge deficit and it's really been doing it since the great financial crisis. In fact, we've said on here and a lot of your guests have said on here that there is no real plan B.
(53:52) This is all about stimulus one way or another. And it doesn't really seem like they can ever take their foot off the gas. So, the government's been running a budget deficit for a long time. I think you'd have to go back to the Clinton era to see a budget surplus, but it really got worse, a lot worse after the GFC. And while this is awesome for markets and it's great for consumers, it's really bad long-term for the country.
(54:16) We're 40 trillion in debt, going up by what, close to three trillion. And that's before we've had a recession because we haven't seen a recession. I don't think you can count the little blip in 2020 really as a recession. We haven't had one since the great financial crisis. So, we'll see what happens. But he talked about a lot of charts.
(54:33) I'm going to try to encapsulate them as fast as I can. I may not hit them all. I'll tell you the ones that we agree with, maybe tell you if there's ones that we don't agree with. But the third year, >> and real quick before you do, I just want to contrast this and correct this any way you like. At New Harbor, you guys use technical analysis a fair amount.
(54:51) You walk us through it every week. But you map that with your macro analysis and bring in things like the debt or what's happening in the economy. Tom is much more of a classic TA guy of, I'm just looking at the charts and I'm looking at the patterns of the charts and what the charts tell me.
(55:13) And those two things aren't always compatible, right? So, some of the differences are going to be you might actually see the TA in a similar way, but your macro outlook may be causing you to have a different position. And I just want to let the audience know there's somewhat of a difference of methodologies here between Tom's pure just-the-charts analysis versus how you guys look at things.
(55:36) >> Absolutely. Tom really gets into the weeds, more of an engineering viewpoint. He mentioned to us that he was an engineering major at West Point, I believe he said. >> And so John and I also are engineering majors. And I think that's probably why we have some commonality in how we look at things.
(55:54) The actual methodology that he uses is different. I think he leans more heavily into seasonality than we do. A number of these charts were about seasonality. For instance, the presidential election cycle, we're really close to entering the third year. And I think he said that that actually starts somewhere around October, November, because he starts from November 1st.
(56:16) So, yeah, it starts in November. We're really close to that turning higher. And if you remember his chart, it's a big up move. He's predicting a big up move based on that seasonality, third-year presidential cycle. In fact, yeah, he said about one to two weeks away, he thinks we could be from that line to start climbing.
(56:36) Also talked about the midterm elections. A lot of our clients have been concerned about the elections, saying if it's a Democratic sweep, we think that'll crash the market, or that's kind of the conventional wisdom. Tom is on here saying it doesn't matter what happens. Doesn't matter. It just matters that there's a decision, that the market knows there's a decision.
(56:54) And we agree with that. At New Harbor, we don't really put much weight into whatever happens. We really don't think it matters. We think whatever matters is predetermined based on the cycles and the charts. Years ending in seven are bullish. I'm not so sure about that one, but I wrote that down and next year is 2027.
(57:15) >> Yeah. Well, that goes to the correlation of Tom. And again, I'm not evangelizing one approach over the other, although I think there's a lot of merit to both. But Tom's approach is sort of like, look, if seven and a half times out of 10 this happens, you should probably expect it to happen on average, right? So, that's sort of where he comes up with this where, as he says when I pushed him on it, he said, look, there's some reason I can see
(57:40) year seven. Sometimes you're halfway enjoying some of the booms of these midterm elections. That's about 50% of the time. The other half he's like, I don't know, but all I know is that the data shows that this is much more likely to happen than not looking at the past.
(57:59) So, >> yeah, absolutely. Absolutely. A couple more quick points and then I'll just wrap up with what I thought were a couple assets he was really bullish about. Number one, corporate. These two last data points are concerning to him. And I'll just qualify them a little bit more.
(58:20) The corporate advance-decline line for high-yield credit has been in divergence for all of 2026. And generally, that's a bad thing. Yeah, he actually drilled in, you might have asked him to, but he drilled in on the next chart, taking a look at the momentum oscillator for the corporate high yields, and they were actually showing signs of turning.
(58:38) So maybe that warning sign is not going to be a warning sign for much longer. >> Yeah. Or just to be clear, signs of nearing a turn, bottoming out. It hadn't reversed yet, but it looked like it was close to an exhaustion point. >> Absolutely. And then margin debt. Margin debt is way, way up.
(58:55) I'm not really sure that he offered a counterpoint for that. Margin debt is a concern. >> We think we're in a late-stage cycle that might even blow off to the upside. So, we could see this market squeeze. We could even see margin debt have one more impulse up and then everything comes down hard. So, that is a negative signpost that we should be aware of.
(59:12) >> Yeah. Sorry to interject. He did actually address that. That's where there was another seven-year cycle where margin debt tends to peak every seven years. And so doing the math from the last peak, it would be at least 2028. So he's saying, even though it's at a new all-time high, it could easily get even higher for the next year, year and a half before it reaches its next peak based upon that 7-year average cycle.
(59:41) >> Well, thank you. I forgot that, Adam. And so that would make sense and that would fit in line with our idea of some kind of blow-off top. We're not predicting a blow-off top. We're not trading by that. >> Yeah, >> viewpoint. You got to be careful. >> But I know you personally think that's more likely, right? That this >> We do think it's more likely.
(59:58) But bear in mind, folks, we're 50% stocks here. We're not 100%. We're not in margin, but we do think that's probably likely given how big this whole cycle has been. We probably need some kind of fireworks show to finally end this whole thing. So, lastly, he's really bullish on crude oil. Yeah, the charts are up and I don't know, crude oil has been hugely volatile.
(1:00:21) I'm surprised we went from about 100 on crude, 105, down to 60, then right back to 105. That's a surprise. But he thinks we're going to go even higher for longer. We'll see. We do have energy stocks in our portfolio because we just follow the strongest sectors, and energy stocks, specifically oil service stocks, have been moving higher and they've given us no reason to sell them.
(1:00:44) Bonds, he's bearish. That's probably somewhere we disagree. We're actually bullish fundamentally on where bonds are here. The sentiment is really washed out. A lot of folks are really negative. Bonds are path dependent. We can see a point where the stock market tops out, drops hard, the Fed comes in, starts printing money.
(1:01:05) QE spigot goes on. And I know you showed something about QE being generally bad for bonds. But in our view, and this is far from a technical viewpoint, this is a macro viewpoint or even a bit of a gut feel based on experience, we think the rates will likely come back down in a flight-to-safety trade.
(1:01:23) And so we're actually bullish on high-quality US bonds. We don't have a lot, 7 to 12% in our model, but we'll see who's right. I think we're probably pretty squarely in opposite camps on high-quality US bonds. >> Okay. Just two things on that. And again, I'm doing my best to speak for Tom, so I might be imperfect here.
(1:01:42) Obviously his bond outlook is driven by the 20-and-a-half-month shift between gold's action and then interest rates' action. And so I don't think Tom would disagree that between now and then you could actually have a big rally in bonds. But it would be more of a cyclical rally versus a secular one, right? And then that could reverse and then the trend of bonds over the next year, two years or so could still be up.
(1:02:10) Bond yields could still be up, even though there could be some violent rallies in between now and then, and I don't know if you would necessarily completely disagree with that or not. >> Not at all. If you just, as an example, take a look at TLT, which is the 20-plus-year US government bond, it's trading at 81.
(1:02:27) It's down year to date and it's been really weak. I could see that going to 120. These are not predictions, just guesses based on the charts. If we have a stock market drop that falls hard, rates come back down, the 10-year comes back down to three and a half, four, even 3%, which I think it might, we could see TLT go even higher and that would be a 50% gain.
(1:02:50) You could see all of that happen and then afterwards, stock market drops, yields come back down, the market figures out that inflation is going to be a problem, and then so between now and two years from now, there could be a good trade in something like TLT, i.e. long-term US government bonds, but after that, there could be a headwind for the following 10 years.
(1:03:10) So, a lot of people that are negative on bonds are thinking that we're recommending buying them and holding them for 10 years, and we're not. We're talking about the next couple of years. >> Yeah. And just a point to underscore there, we talk a lot about, as market uncertainty grows, it gets more and more dangerous to identify a long-term trend and just say, I'm just going to put all my chips on this and then I'll look at it in a couple of years.
(1:03:38) Because you could actually be right on the destination. But given your positioning, you could get killed six ways to Sunday several times along the path between here and there depending upon how volatile that path is, right? And you're nodding as I'm saying all this, >> Mike. >> So last question for you and then John, we'll bring you in.
(1:03:57) So Mike, let's assume for a minute that Tom's correlations prove correct and that the markets get a nice jolt to the upside in the next week or two and then it's game on for the rest of the year into next year. Were that to happen, how is New Harbor positioned for this? How might you start changing your allocation if you began to have a lot of confidence that hey, Tom's forecast is starting to play out? >> Yeah, this is where the art comes in.
(1:04:32) I think the definition of art I read recently is skill combined with interpretation. And so we've got skill and we've got experience. We don't know exactly what the market's going to do. We're going to see what the market does and then we're going to interpret that and then combine it with the skill that we have of the past.
(1:04:53) And so if we get a parabolic vertical move up, and I'm talking about 8,500 on the S&P, 9,000-plus, that goes straight up, there's a number of things that we might do. We might literally reduce equity into that parabola, right? And we'll probably be early, but we might do that because we know where we are in the story versus just passive buy-and-hold people.
(1:05:14) We might even buy long-term puts to try to defray downside and/or make money on a downside break. That's different. A parabolic vertical move up in the space of a few weeks or a month is different than a move higher over the next 6 months. A move higher over the next 6 months that's a steady 45° angle, we're probably more likely to stay close to where we are, 50%-ish equity.
(1:05:40) I don't see us going much higher and I don't see us dropping equity in that scenario. And so we'll probably just ride the trend as much as we can under that scenario. But it depends upon the shape and the speed of it really from a tradability standpoint. A parabola might be easier to trade in terms of timing the turn, and nobody's going to be perfect with that, and trying to reduce the deductible or the give-back on the turn.
(1:06:08) So that's how I see it. Depends upon how it looks and feels when it happens. >> Okay. So obviously folks will have the New Harbor team on weekly going forward here. So, as their interpretation becomes clear to the point where they're starting to make portfolio adjustments, they'll be sharing that with us here in real time along the way.
(1:06:29) All right, John. Feel free to add anything to what Mike said. And I also want to give you a big question too, which is, not long before we hopped on with Tom, we just found out the Fed did the first rate hike in several years. Love to hear your reaction about that in terms of the decision, any implications you think it might have.
(1:06:50) >> Yeah, thank you, Adam, and thanks for having us join. Always fascinating to listen to Tom's comments. We really appreciate the data he brings to the table. That's where our brains like to go a lot of the time. I guess I'd like to, and I wish we could have a textured conversation with Tom right here now because I think he would agree with what I'm about to point out.
(1:07:14) As much as a lot of his charts focused on averages and cycles, I think if we were here to talk with him right now, he would agree that there's some signal that's lost when you average things out. He first showed up a chart there where it was the different presidential cycles.
(1:07:32) It was kind of a spaghetti bowl of charts and he averaged them out and came out with this nice kind of profile, on average the third year higher and this and that. Look, we manage money for real people. So, we got to concern ourselves not with the average, but the outliers, because the outliers aren't random events.
(1:07:52) When markets go through their inevitable cyclical challenge points, our very strong take is that it's not a random event. In fact, usually when markets have prolonged negative periods of returns and things like that, there are a number of coincident factors, you can call them conditional probabilities if you want to get technical, that are almost always present.
(1:08:15) Things like extra-high valuations. These are not accidents. They happen not to precisions of days or calendar months or whatever like this. But they happen with very strong reliability when you zoom out from a broader standpoint. To make this point, I want to give you a chart here that was put together.
(1:08:34) This actually is data that was just put together by a data service that we subscribe to called Nasdaq Dorsey Wright. It's a division of Nasdaq. And this looks at, it's a little busy, I'm going to cut right to the chase. So it looks at average real return, inflation-adjusted return, over different time horizons. Now key here is average.
(1:08:56) So this is essentially the equivalent of the average charts that Tom shared. Let's look at a 60/40 stock-bond portfolio and look at a 10-year period. So on average, a 60/40 portfolio has returned 87% real return cumulative over a 10-year period. That's the average. Now, that sounds great, right? The reality though is that it's not always so nice.
(1:09:17) In fact, if you look at the worst real return by period for 60/40 for a 10-year period, you lost 32% in real purchasing power of your portfolio over a period of 10 years. And there was a drawdown in that instance of nearly 41%. And you can see these lengths of times by drawdowns, 12 years essentially for a 60/40 portfolio.
(1:09:42) And it harkens back to a chart that I've shared many times and I'll keep sharing it. This is a chart that GMO put together looking at so-called lost decades. And this is for a 60/40 portfolio, real returns just like the chart I just showed you. And you can see all these gray periods here are periods where in a good scenario you went nowhere, but in some scenarios you lost money on a real inflation-adjusted basis.
(1:10:06) So for example, the decade following the tech cycle. That's the thing that I think is lost when we talk about average analyses and we have to be worried about those kinds of things. Not just for the sake of hey it might happen, but there are signposts and data conditions that are very reliably indicative of an increased probability of those kinds of things happening, and we're kind of right square in one of those phases right now.
(1:10:32) Doesn't mean we top out today or we crash tomorrow or whatever, but in the vicinity, if history's any guide, we think the next decade is likely to be very subpar compared to average and maybe even negative on a real return basis. That's one real important thing I want to bring back to the practicality of what we do for everyday people in their retirement scenarios.
(1:10:52) >> Okay, great. And just one thing I want to note, and we're all talking for Tom, which is, take with a big grain of salt, folks, because we're not Tom, but I think Tom would say, "Hey, look, I shared kind of why I'm bullish in the here and now, but look, there are periods I can see, certainly once we get closer to 2028, where I could be making the exact opposite argument and being very bearish about a lot of these things."
(1:11:17) So, in no way do I think Tom's current bullishness is excluding the type of risk that you're talking about, John. >> Exactly. So, let's talk about the Fed. Yeah. Today the Fed raised the so-called federal funds rate. Probably the least uncertain Fed meeting in the history of mankind. I think we went into today with 93 or something like that percent market-implied probability that the Fed would raise.
(1:11:40) Yet, there were still people I think calling bluff and saying, "No, Warsh won't raise. He's the guy that Trump brought in to cut rates." So there was a 25% raise in the short-term federal funds rate. One of maybe the surprises that came out of today's meeting is that it was a unanimous 12-to-zero vote in favor of that.
(1:12:04) Recent meetings, the big news has been the lack of unanimity. Today was unanimous, and unanimous for a rate increase. And the messaging also I think said very probably we'll have at least one more rate increase this year. Okay. So, that was the first rate increase since July of 2023.
(1:12:29) I'll just show you a chart here to show kind of the profile. This is the chart of the federal funds effective rate. So, last rate increase was back here in July of 2023. There was a long period of pause and then there was a rate cut campaign, pause, rate cut, and then a pause for the last several months, and then again today that was raised a quarter percent.
(1:12:50) If we look at the Fed funds FedWatch on the CME, this is a way we can read the market probability for future rate action. I'm looking at the December of '26 meeting here, the meeting two meetings out from now, the end of this year. And you can see the market assigned zero probability of any cuts from here.
(1:13:13) And an 88% probability of further hikes. And you can see there's a hike of another quarter basis point, 25 basis points, 48% probability of that, and almost a 40% probability of a full additional two quarter-percent hikes. Okay, so quite a different story. If we rerun the tapes to where we were back a year ago, it was almost the exact opposite story here.
(1:13:41) So there's been a dramatic change in the expectations by the market and even the actions by the Fed. So this is pretty big stuff. The initial market reaction is always confusing. Today we saw quite a bit of volatility. If I just pull up a couple charts here, you can see, I'll pull up an hourly chart or minute-by-minute chart.
(1:14:04) Let's pull up an hourly, just zoom out a little bit. Or we'll go minute. Why not? So this is today's action. And if we look at the S&P 500, >> just we're not seeing it. >> Oh, sorry. This is a minute-by-minute chart of the S&P. Let me go to the ETF here. This dark black window is the market hours between 9:30 and 4.
(1:14:26) You can see right around when the Fed announced at 2:00, there was an initial spike higher, but then when Warsh started giving the press conference, we saw a pretty notable decline in the markets. Closed down not quite half a percent. If we look at TLT, which is long-term Treasury bonds, similar kind of thing.
(1:14:46) We saw a spike, but then a sell-off. I will note that it was one of the few areas of green on today's screen. If you look at a broad swath of assets, long-term bonds actually did end up on the day slightly higher. >> Precious metals, commodities sold off pretty hard. So, pretty ugly day in the sense of the reaction.
(1:15:06) I wanted to pull up a chart of a longer-term chart of 10-year Treasury yields. This is a monthly chart and you can see for the last three-plus years, we've been trading in a range here on the 10-year yield between about 3.2 and let's call it five. Okay. Today, the yield topped out at just a little bit over five.
(1:15:29) This is off by a decimal place. So 5.016 is where it topped out today. Closed a little bit below there, slightly below, but we're at the upper end of the range, to Mike's point about being quote-unquote bullish bonds. I would kind of caveat that, and Mike did so I think as well, that we're not pound-the-table bullish.
(1:15:47) There's really fundamental reasons why the bond market has been as challenged as it has. It's not the buy of the century. We wouldn't pound the table here and say sell everything, load up on long-term bonds, you're going to be perfect. That's not what we're saying. But the degree of negative sentiment and distaste for bonds we think has gotten really overdone.
(1:16:07) So we have about a 32% allocation to fixed income right now. The average duration of our fixed income sleeve is about 5 years. Again one piece of it, about 7 and a half percent of our portfolios, is in long-term Treasuries. We'll probably look for opportunities, if we see technical improvements, to extend out on the maturity spectrum there and lengthen the maturity of our bond holdings.
(1:16:32) I'll pause there, Adam. I do want to give a quick update. We have seen a material degradation in our broad stock market indicators. So, we're increasingly poised to be on defense here. We can certainly >> I hate to do this, John. I'm going to have to earmark that for next week. We're about 2 minutes from me having to hop on the live stream with Axel Merk about today's Fed announcement.
(1:16:56) So, my apologies for having to cut this a bit short. But I think it's a great point actually to expound on in some detail when we have you guys on in just a couple of days next week. >> That sounds great, Adam. And we'll watch for you and Axel coming on momentarily. >> All right. Thanks. So, folks, and just wrapping up here.
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(1:18:07) Only two weeks left at the lowest early bird price. So, if you haven't registered yet, go to thoughtfulmoney.com/conference and get your ticket now. John and Mike, thanks so much. Hate that I'm having to hop off early here for you guys, but like I said, we'll do a deep dive next week into what you were just talking about there, John.
(1:18:26) >> Sounds good. Adam, thanks so much and we'll see you soon. >> Thank you, Adam. See you soon. >> All right, everybody else, thanks so much for watching.