TNX). – Andrew Thrasher

Why The 10-Year Treasury Yield Could Drop Under 2.4%

Posted on July 24, 2014 by Andrew Thrasher, CMT

With each passing day it seems the bearishness towards bonds refuses to ease. The survey’s of economists still show a heightened distrust for the Treasury market, even though prices have marched higher for the bulk of 2014. When we look at the weekly chart of the 10-year Treasury Yield ($TNX) we can see that support may be under 2.4%, and if prices do in fact break 2.4% that may open the next wave of shorts to get squeezed.

Below is a weekly chart of $TNX going back to 2008. I’ve included the 200-week Moving Average as it has been an important level of support and resistance for the 10-year Yield. In 2010 and 2011 we saw the 200-week MA act as resistance when bond prices were falling prior to the corrections in equities that took place each of those years. In 2013 we saw this long-term Moving Average act as support when yield was falling in October. And once again this MA acted as support in late May of this year when $TNX last approached the 2.4% level.

Once again we see yield approaching this critical level of support that currently sits at 2.38%. A break under 2.4% would shock a lot of traders. If we look at momentum, using the Relative Strength Index (RSI) we aren’t even close to seeing oversold conditions. During past bottoms in yield the 14 week RSI dropped to under 30. Of course it’s not a requirement for momentum to become ‘oversold’ on this weekly chart for yield to rise, but that’s been the case during previous intermediate-term bottoms.

When we look at the latest batch of Commitment of Traders (COT) data in a chart from SentimenTrader we can see a lack of concern for Treasury yields continuing to fall, with over 3,000 contacts net-long. While the previous three bounces in yield have occurred when traders lessened their bets in favor of a higher yield down to under 200,000 contracts. There appears to still be too much optimism for yields to rise for them to actually do so.

Going forward I’ll be watching to see how the $TNX reacts if it makes it back to 2.4% and the prior May low. If we do break under 2.4% then the 200-week Moving Average may come into play as the next possible level of support.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Stock Market Hits New Highs But Lacks Confirmation

Posted on May 14, 2014 by Andrew Thrasher, CMT

While the S&P 500 breaks through 1900 and traders rejoice over the fresh new high, it seems the same level of excitement is not being felt in other parts of the market. There are multiple divergences that are taking place and showing a lack of confirmation. On my blog I’ve discussed multiple times the lack of participation in momentum for the S&P 500, but we can also see divergences in bonds, small caps, and defensive sectors showing leadership. However, the two measures we are seeing excessive risk taking in are the Put/Call Ratios and the Volatility Index which is sitting at historical lows. The other measures I follow appear to be negatively diverging from the overall equity market. Below are some examples.

Below is a chart I referenced earlier this year; it shows relative performance of High Yield Corporate Bonds ($HYG) vs.U.S. 20+ Year Treasury’s ($TLT). In the bottom panel we have the 10-Year Treasury Yield ($TNX). For the bulk of the current bull market we’ve seen these two measurements for the bond market confirm the movements in equity prices. As stocks go up, so does the ratio between HYG and TLT as investors show preference for the more risky high yield market over government debt, and same for the 10-Year Yield which often moves with the stock market. However, that’s now the case today. We have a glaring divergence forming in both measures of risk within the bond market, something we haven’t seen since the 2011 and 2012 highs.

Next we have a chart showing the S&P 500 ($SPX), PowerShares Nasdaq ($QQQ), and the Russell 2000 iShares($IWM). While the S&P hits new highs the Nasdaq and Russell 2000 are off nearly 5% from their 52-week highs. SentimenTrader.com wrote in a recent note that some examples of past instances of this occurring are: 1983, 1987, 1990, 1998, 2000, and 2006. Jason wrote that the eventual ‘reaction’ of this divergence in the S&P 500 varies in length, “from immediately (’83, ‘90’, ’00) to over a year (’06). If traders were feeling more confident in the upswing in stocks, why aren’t they bidding up these higher beta indices?

To keep reading and see the rest of the charts: Stock Market Hits New Highs, But Lack of Confirmation Concerning (See It Market)

Weekly Technical Market Outlook 3/3/2014

Posted on March 3, 2014 by Andrew Thrasher, CMT

You think we’ll hear much about Russia this week? Probably. The great aspect of using technical analysis is we don’t need to immerse ourselves in the headlines or know the intimate details of when country is currently invading another country. If the market feels this information is important than it will show up in the price action. It can be easy to get caught up in flashing “breaking news” events and attempting to dissect the impact it will have on price movement. While the situation in Ukraine is important and will affect hundreds of thousands if not millions of lives, we must categorize that in a different part of our thought process and allow our chosen strategy or lens to lead our bias.

Equity Trend

Little needs to be said about the current trend of the equity market. It’s still positive as we hit new highs last week in the S&P 500 ($SPX).

Equity Breadth

We had a good week in market breadth last week with the Advance-Decline line continuing to head higher. While we saw some consolidation and an eventual new high in the S&P, the Advance-Decline Line, which measures the number of NYSE stocks heading higher vs. those in the red, has almost gone in a straight line up. As expected, the Percentage of Stocks Above their 200-day Moving Average has broken out of its multi-month range as it tries to kiss 75%. However, there is one measure of breadth that is still concerning….

Below is a chart of net number of stocks making new highs vs. new lows and then taking a 5-day total to show what’s taken place in a single trading week.This chart shows the last 11 years and I’ve drawn trend lines on the breadth measure to show negative divergences. In 2005 and 2006 we saw the net numbers of new highs and new lows kept hitting resistance while price advanced. This lead to breadth making lower highs, diverging from price before a top was set in 2007. We also had a notable divergence of lower highs going into the short bear market in 2011. Last year with the equity market challenging 30% gains, the new highs-lows indicator mimicked the action in ’05/’06 – hitting resistance. However towards the end of 2013 and into the first two months of ’14 we have begun seeing lower highs once again.

While the previously mentioned measures of breadth are showing signs of confirmation for the new high in the S&P, this measure is not. Is this a sign of future weakness to come in to the market? Maybe. Although its hard to make that argument with the Advance-Decline line showing such strength, which it was not doing going into the 2007 high.

Equity Momentum

The two more traditional forms of momentum, The Relative Strength Index (RSI), and the MACD, are both not confirming new highs. However, the RSI indicator is still rising and could be just ‘late to the party’ before reach ‘overbought’ status and showing confirmation. The Money Flow Index, which incorporates volume into the momentum calculation has reached an ‘overbought’ status, something we haven’t seen since last October.

Bonds

To keep with the theme of divergences, I want to take a moment and look at the bond market. Below is a chart of the S&P 500 ($SPX) with the ratio between the High Yield Corporate Bond ETF ($HYG) and 20+ Year Treasury ETF ($TLT) in the second panel and the 10-year Treasury Yield ($TNX) in the bottom panel.

It’s often said that the smartest traders are in the bond pits. This may be why we look to bonds to confirm what may be taking place in the equity markets. If the smartest guys (or gals) on The Street are bond traders, then they aren’t showing the same level of excitement as equity traders right now.

One way to measure ‘risk appetite’ is by looking at the relative performance of high yield debt compared to safe-haven Treasury bonds. When this ratio (green line) is rising we know that traders are showing a bias towards high yield bonds which means risk-taking is still in vogue. We also want to see the 10-year yield move with the equity market to help confirm an advance. Right now, neither of these are occurring. It appears bond traders are showing more signs of concern than what’s taking place in equity price action, which raises a yellow flag for the new high we hit last week. Treasury bonds are being favored over high yield and the 10-year yield has been heading lower – both measures diverging from recent equity price action.

60-minute S&P 500

As I mentioned last week, the 50-1hr Moving Average would likely be a good place to look for support on any dips. The divergence that was taking place in the Relative Strength Index was able to be worked off as the RSI indicator broke above 70 with the S&P hitting a new all-time high. The MACD is still showing a divergence on the short-term view, refusing to cooperate with the bulls. I’m writing this on Sunday night and if the futures market is giving us any indication to how trading will be today (Monday), we’ll be cutting right through previous support like a hot knife in butter.

Last Week’s Sector Performance

Two weeks ago the strongest sectors were health care ($XLV), utilities ($XLU), and energy ($XLE), all of which showed relative weakness during trading last week. The materials sector ($XLB) was the strongest sector last week, with consumer discretionary (cyclicals) ($XLY) and consumer staples ($XLP) rounding out the top three.

Year-to-Date Sector Performance

For the first time in 2014, healthcare ($XLV) has pushed its way to the top spot in sector performance, showing a repeat of 2013. Utilities ($XLU) still appears to be a trader favorite as it is the second strongest sector YTD. Consumer staples ($XLP) continues to stray from the pack of low beta sectors, as its the worst relative performer in 2014.

Major Events This Week

While Russia invading Ukraine will likely hold as the major headline this week, as we approach Friday the focus will shift to the Non-Farm Payroll report.

Monday: ISM Manufacturing Index and Construction Spending
Tuesday: None
Wednesday: Beige Book
Thursday: Jobless Claims and Factory Orders
Friday: Non-Farm Payroll

Weekly Technical Market Outlook

Posted on December 9, 2013 by Andrew Thrasher, CMT

I hope you all had a good weekend. I got a lot of great feedback from my Weekly Technical Market Outlook post from last week, so I’m happy you guys are finding this type of post useful. While the bulk of the categories I’ll cover will not change from week-to-week, I believe a level of consistency is important; I will try to add categories that I feel are important to cover as they pop up. With that said lets get into it…

Equity Trend

The trend for the S&P 500 ($SPX) continues to be up. Last week we saw a slight dip but buyers stepped in at the 20-day moving average to close out the week with strong move on Friday. I’ll continue to be watching the 20-day MA for short-term support on any further weakness.

Equity Breadth

Last week we did not see much improvement in breadth, which is to be expected with the weakness we saw in the equity market for the bulk of trading.

The bottom panel of the chart below shows the percentage of stocks above their 200-day moving average. This measure of market breadth has garnered quite a bit of attention over the last few months. While the negative divergence is important to point out, the percentage itself is still north of 60%.

I reference 60% because that’s the level it was unable to get back above at the 2007 high. We saw the percentage of stocks above their 200-day moving average drop for nearly eight months before a top was put in for the S&P 500 ($SPX) in ’07. While we are presently approaching the same duration of deterioration, the percentage itself still shows the bulk of stocks in theoretical up trends (above their long-term MA). A break of 60% would also end the trend of making higher lows for the percentage above 200MA, and that’s when I think it’ll be time to start getting concerned. So while this metric of market breadth is worrisome, it’s not yet to levels I feel trigger a red flag.

Equity Momentum

Nothing major happened in equity momentum last week. We saw the Relative Strength Index hold above 50 during the slight bout of weakness and the MACD and Money Flow indicators both dropped but aren’t sending serious warning signs. We still must contend with the negative divergence between momentum and price, especially if we see another lower high made in the RSI if the S&P makes a run at a new high.

S&P 500 60-Minute

In last Monday’s Technical Market Outlook I discussed the negative divergence I was seeing in two momentum indicators (RSI and MACD) on the 60-min chart and that they could lead to lower prices in the short-term. The level of support I was watching was unable to hold as price fell to the November 20th low. Going into the short drop we had a negative divergence in the RSI indicator (top panel) and as price went lower we began to see a positive divergence in the same indicator. This helped act as kindling and the match that lit the fire to send stocks high being the non-farm payroll report on Friday. If things continue to improve I’ll be watching the 1810 and November high as possible resistance levels.

Last Week’s Sector Performance

Below is a chart of the relative performance of the nine major S&P sectors for last week. The percentages shown represent the sector’s performance in relation to the S&P 500, not their actually return. As expected the defensive sectors lead last week, with utilities showing the strongest gain. It’s interesting to see health care be further back in the pack, away from its lower-beta counterparts.

Year-to-Date Sector Performance

No big changes in sector strength year-to-date. The three strongest sectors are still health care, cyclicals (consumer discretionary), and industrials.

Bonds

The bond market had some interesting price action last week. The strong non-farm payroll data that showed unemployment had dropped to 7% in October sent the 10-year Treasury Yield ($TNX) up 21 basis points and above 2.9% intraday on Friday. However, we also saw a positive move for several bond ETFs. Junk Bonds ($JNK), 20+ Year Treasury’s ($TLT), and the Aggregate Bond Index ($AGG) all saw gains in the face of rising bond yields on Friday.

With that, I wanted to take a look at the chart for the 10-year Treasury Yield. We have an interesting level of resistance just a few basis points away. The blue line on the chart below creates a trend line off the 2010 and 2011 highs in yield. I’ve also marked the 2013 range with green dotted lines. To break out of this range we either need to see the 10-year yield get above (and hold) 3% or get down to 2.4%, which would be under the July and October ’13 lows.

Sentiment

There are two sentiment-related charts I want to show this week. Both come from SentimenTrader, which is an excellent subscription service for sentiment data.

SentimenTrader has a set of indicators that are classified as intermediate-term (1-3 months). The chart below shows the overall composite score of those indicators, which includes for example COT data, AAII Survey, and option activity. This gives a good overall view of equity sentiment. As the chart shows, sentiment is still at elevated levels but only for the second time this year.

Next is a bond sentiment chart, which uses data from the Rydex family of mutual funds. The chart below shows the percentage of assets held in bond bullish funds. As you can see, assets have been flooding out of the bullish bond fund and hitting levels not seen since at least 2010. We’ve seen many predominate economists and analysts turn bearish on bonds, and the data from Rydex indicates the individual investor has the same thinking. You’ll notice that previous low levels over the last year have not led to substantial bounces in bonds, which means we should not expect troves of cash to steer back into the bond market based on this set of data. However, this level of bearishness is important to keep in mind, especially as bond yields get close to testing resistance as I mentioned in the Bond section.

Major Events This Week

This week doesn’t look to be a very data-intensive week. Here’s what is scheduled to be announced that traders may want to keep an eye on:

Monday: None
Tuesday: JOLTS (job openings) report
Wednesday: Treasury budget
Thursday: Jobless claims, Retail sales, and Business inventories
Friday: Produce Price Index

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Will Taper Talk Break This Long-Term Trend Line in Bonds?

Posted on August 26, 2013 by Andrew Thrasher, CMT

There has been a lot of ink spilled over the topic of whether or not the Fed will taper in September. It seems the consensus is for a $20 billion decrease in QE. I’m not completely sold that we will see a tapering in September. If we do I think it’ll be closer to $10 billion as we have already seen a spike in rates, both Treasury and mortgage, and the Fed will likely want to dip its toe in the water before completely jumping into the taper pool. Meanwhile, the bond market is preparing itself for a taper as the 10-year Treasury yield continues to rise.

In June I wrote that the 10-year yield ($TNX) was approaching its 200-week moving average. This MA acted as resistance in 2010 and 2011. Amid the massive outflows from bonds I was looking for a bounce in bond prices (and thus a drop in yield). But it didn’t happen. We saw the 10-year Treasury yield slightly consolidate around the 200MA but taper talk lit the match that took bonds lower and the 10-year yield higher.

With the continued march in yield we are now at a long-term trend line from the 2006 high. This trend line (along with the 200-week moving average) also seemed to stop the rise in yield in ’10 and ’11.

Turning to sentiment data, specifically the latest data from Consensus, the percentage of those bullish on bonds is at 21%, just shy of the low set in 2011 as bonds bottomed out, which was the lowest bullish percentage going back to 2005.

Next week we’ll get the unemployment data and that could be a deciding factor in whether the Fed pulls back a portion of the QE program or if Bernanke keeps his cash helicopter hovering over the financial markets. Going forward I’ll be watching the above trend line and see if the bond market gets any reprieve or if Fed rumors keep the Treasury yield elevated.