I'm writing this on Wednesday afternoon (May 22), so for all I
know we could wake up Thursday with the futures at new highs.
However, it's worth noting some of the technicals that today's
sharp reversal has put in play.
The 30-year Treasury deserves the first look. As I have tweeted
several times in the last few days, the long bond has been toying
with very important levels for some time. Today almost all of the
remaining bullish hopes were shredded. Namely:
- Big "outside" day confirmed by the largest volume since the
June contract has been trading;
- Spike higher on Ben Bernanke's speech was rejected right at
the 144-day Exponential Moving Average (EMA);
- 21-day EMA crossed below the 55 EMA;
- All three EMAs are now downward sloping;
- Close below daily TDST Level Down at 142-31 while just on bar
4 of TDST Buy Setup; "a lower open and lower low" will qualify
the break of the TDST Level Down support (for a short primer on
DeMark indicators, see here
- On the weekly chart (using the continuous contract) there's
trendline support at 141-30, weekly TDST Level Down at 139-30,
and TD Prop Exhaustion Down target at 138-13.
Some big picture thoughts on what the long bond action may mean:
- The long bond has been weak for quite a while despite the
Fed's buying; bond offers into POMO bids have been pretty high of
- The long bond dropped all day Tuesday even during the nasty
equity reversal; no flight to safety there; sure smells like bond
holders are putting their money on a Fed exit;
- Speaking of exits, Bernanke expressly stated in his testimony
that the "run-off" option may be the preferred approach for
ending QE. Buy that narrative at your own risk: Having to "run
off" the portfolio means the Fed knows it is trapped and cannot
sell into a market that has no buyers - at least not for many
percentage points higher in interest rates. And who will buy the
Treasury future bond issuance? Can we ignore that the Fed has
effectively been monetizing the entire federal government
- The possibility of a "jump in interest rates" has been
advertized wrongly for years, with yours truly at the head of the
pack. That does not mean that it won't happen, and not
"eventually," but more like "soon";
- After the initial scare, equities of banks, insurers, asset
managers, and anything that can borrow short and lend long should
be a nice to place invest;
- REITs, utilities and MLPs, where unfortunately many money
managers have hidden their conservative, "I want safe returns"
clients, are at risk of being shredded, as risk-free rates become
more competitive with other type of yields (and how much of those
yields are the result of leverage anyway?).
On to the equity indices. Aside from the nasty-looking "outside
reversal day," which is already getting all sorts of attention, the
(INDEXSP:.INX) escaped from closing below the daily TD Reference
Close Down at 1648.10. That, combined with a lower open and lower
low this morning, would have been a horrible setup for bulls. But
no cigar for the bears, and a fair amount of more damage is needed
before anyone can argue that the chart looks bearish.
The Nasdaq is cutting it closer. The
(INDEXNASDAQ:NDX) closed $0.20 below TD Reference Close Down, but
PowerShares QQQ Trust ETF
) managed to close $0.02 above. Interpret it however you will, but
see it. More importantly, even though it has not mattered for
months, on Tuesday the QQQ completed a TD Combo Countdown Sell; the
corresponding Risk Level is at $76.66.
(INDEXRUSSELL:RUT) "little guys" took it squarely on the chin. Both
the Index (
) and the
Russell 2000 ETF
(NYSEARCA:IWM) broke the daily TD Reference Close Down. Combined
with the "price flip" printed today, if we meet the "lower open and
lower low" conditions, the small caps look on their heels.
Don't tell corporate credit and derivatives that their equity and
Treasury brethren are misbehaving.
While the latter were getting manhandled, the corporate bond market
and related derivatives continued the never ending party. After $11
billion of new issuance Tuesday it was $12.6 billion yesterday.
Spreads were flat and credit derivatives continue their incredible
shrinking show, with both
) CDS tighter by 7%.
Bottom Line: Unless you believe in unicorns, you cannot possibly
think that equities will never again correct for more than just a
few hours. In fact, we know the mantra that the sharpest
corrections take place during bull markets. The question is how
deep a correction we will eventually have -- 3, 5, 10%, or the
October 19, 1987 variety? The 1987 crash was certainly a crash, but
in the scheme of the budding bull market, it was little more than a
4-day correction. The underpinning of this bull market (corporate
credit) remains intact, but we are stupid overbought at these
levels, so manage accordingly.
As for the long bond, the story may be different. There's
absolutely nothing structural to justify long term rates where they
are. Unlike stocks, where companies (according to Bill Gross) are
buying back $50 billion of their own shares every month, the long
bond rate is being held down by the Fed "Mother of All Ponzi
Schemes." This scheme will end like all Ponzis end, with the last
sucker holding the bag. Unfortunately, we are all suckers because
what will be decimated is the Fed's balance sheet (our balance
sheet), and we will get hit again when our cost of money rises
rapidly while the Fed's assets sink just as fast.
I could have, and I have, argued multiple times that the bond gig
looked like it was on its last leg, only to see it turn the other
way. Maybe this time is dÃ©jÃ vu all over again, but it
doesn't mean that technically it doesn't look as ugly as ever.