Are Treasury Yields Headed Lower?

Are Treasury yields headed lower?

I am beginning to see signs that there is a high likelihood of this occurring over the next couple of weeks. Figure 1 is a weekly chart of the Ultra Short Lehman 7-10 Year Treasury (symbol: PST); this is an ETF that corresponds to the inverse of the daily performance of the Barclays Capital 7-10 Year U.S. Treasury index. In other words, it moves in the direction of Treasury yields. With Friday's close, PST is now trading below 3 pivot low points, and as I have shown in the Dollar Index (and observed with other assets) this is a very ominous pattern. In the figure, I have labeled the 3 pivot low points. A weekly close back above pivot 1 at 52.89 would violate this pattern.

Figure 1. PST/ weekly

Figure 2 is a weekly chart of the yield on the 10 year Treasury (symbol:$TNX.X), and this is the same graph that I showed on October 9, 2009, when we last reviewed the technical picture. The key pivotal area appears to be around a yield of 3.437%. Yields are currently below this area after a brief foray above. However, yields do remain above the 40 week moving average and the down sloping black trend line (both positives). Failure to remain above the pivot low point at 3.437% is the first sign of weakness in Treasury yields.

Figure 2. $TNX.X/ weekly

I believe the implications of lower Treasury yields are noteworthy as it implies a deflationary environment and slowing economy. Lower Treasury yields typically signal the peak in equities especially during bear market rallies. See the article: "David Rosenberg: This Is Your Last Chance". Of course, a continued deflationary environment could be interpreted as giving policy makers (i.e., the Federal Reserve) carte blanche with regards to money creation. Economic weakness implies ongoing Fed stimulus and Dollar destruction; this would be an equity positive. Of course, these trends cannot go on forever without ill towards effect. We are seeing signs of exhaustion in equities and the Dollar is near support last seen in early, 2008.

Investor Sentiment: Smart Money Turning Bearish

After 15 weeks of being neutral, the "smart money" indicator has turned towards a more bearish reading. The "dumb money" indicator remains in the extreme bullish zone. While not there yet, the indicators are heading in the direction that one would expect to see at a market top.

For now, I will continue to state what I have been stating for 5 weeks as it has served us well in defining the price action seen in the major market indices:

"Equities are for renting not owning at this juncture. I am not calling for a market top, but prices should trade more in a range, and if you intend to play on the long side, it will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market. The upward bias still remains as long as investor sentiment is still extremely bullish, but there is probably greater risk of a market down draft now than in past weeks."

The "Dumb Money" indicator, which is shown in figure 1, looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "Dumb Money" indicator shows that investors are extremely bullish.

Figure 1. "Dumb Money" Indicator/ weekly

The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" has dropped below the neutral line for the first time in 15 weeks. During this time, the S&P500 gained about 10%.

Figure 2. "Smart Money" Indicator/ weekly

Figure 3 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. There is nothing noteworthy about the indicator value, and from the InsiderScore weekly report we get the following two insights: 1) companies with selling outnumbering companies with buying by a 2-to-1 margin; and 2) insiders - as they've done since early June - showed a distinct interest in selling.

Figure 3. InsiderScore Entire Market/ weekly

Figure 4 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. Not only do we get to see what direction these market timers think the market will go, but we also get to see how much conviction (i.e., leverage) they have in their beliefs. Typically, we want to bet against the Rydex market timer even though they only represent a small sample of the overall market. As of Friday's close, the assets in the bullish and leveraged funds were greater by a slight amount than the bearish and leveraged; referring to figure 4, this would put the green line greater than red line. Essentially, there is no real edge with regards to this short term data set.

Figure 4. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily

Considering the sentiment picture on its own, we can sum up by asking one question: is this the market environment that will take you from here to there? I believe that answer is "no". Markets can always go higher confounding the pundits, but the high odds play according to the sentiment data is that the major equity indices are in a topping process. This implies a trading range at best. There is risk of a down draft as markets "fueled" by the proverbial "liquidity" are prone to quick sell offs. The outlier trade is a market blow off or a spike in prices, and I do not rule this possibility out because of the ongoing downtrend in the Dollar Index. It is possible but it is not the high odds play.

The Greats Of The Blues: Magic Sam

In my effort to bring something completely different (and non market related) to the blog, I present Magic Sam in our "Greats of the Blues" series.

Samuel "Magic Sam" Maghett was born in Mississippi in 1937. He moved to Chicago in 1950 and he started recording in 1957. His sound was new and had a definite edge, and many called it the "West Side Blues" referring to the rough and tough West Side of Chicago. Sam gained local notoriety playing the clubs and lounges in this fertile ground for the Blues, but he didn't gain critical acclaim until 1969 when he played the Ann Arbor Blues Festival. Tragically - and this is the Blues after all - Sam's life was cut short when he died of a heart attack that very same year at the age of 32!

In his years, Magic Sam recorded only two records. West Side Soul (recorded in 1967) is considered one of the greatest blues LP's of all time. For Blues aficionados, this album often makes it to the top 10 albums you would want to have if abandoned on a deserted island.

For more on Magic Sam, go to this link at Wikipedia.

In this 6 minute video, there is a brief interview followed by two songs, "All Your Love" and "Sam's Boogie". Pay attention to the vocals, and also note that Sam is playing Earl Hooker's guitar. Hooker was another Mississippi native and West Side Blues legend.

3 Breadth Charts You Won't See Anywhere Else

Figure 1 is a daily chart of the S&P500 (symbol: $INX). The indicator in the bottom panel comes from mathematician James Meikka. Meikka developed a formula to measure advancing and declining issues that prevents drift and forces it to maintain a consistent relationship with the zero line. It is like a McClellan Summation Index. Instead of applying the indicator to advancing and declining issues, I am utilizing NYSE up volume versus down volume in figure 1 (the data is hidden). So my indicator in the lower panel is a measure of advancing volume versus declining volume.

Figure 1. SP500/ daily

The March, 2009 low is noted in figure 1. Point 1 shows the peak of the initial thrust from the March low. Both price and our volume indicator made new highs. At point 2, price made a new high, but the indicator did not; this is a negative divergence that led to price weakness over the next 4 weeks. Point 3 shows that price and the volume indicator made new highs together, but starting with point 4, price made a new high but the indicator has started to lag. Point 5 is another new high but the indicator remains way below its mid-September peak. My interpretation: stocks in the NYSE are not receiving the sponsorship to justify the recent highs in the index.

Figure 2 is a weekly chart of the S&P500 (symbol: $INX), and the indicator in the bottom panel shows the percentage of NYSE stocks trading above their 40 day moving average. While prices are making new highs this past week, the number of stocks trading above their 40 week moving average continues to hover around 50%; furthermore, the trend from the March low has been broken. My interpretation: another sign of weakness as the rally narrows; there is weakness under the surface.

Figure 2. SP500/ weekly

Figure 3 is a weekly chart of the S&P500 (symbol: $INX) with the NYSE cumulative volume index in the lower panel, which comes from the Worden Brothers software. The pivot low point identified with the blue up arrows remains the "line in the sand". The current value is very close to closing below this pivot point, and in essence, this would represent a bearish signal. Typically, there is a tight correlation between cumulative volume and price, and the situation here once again suggests internal market weakness. I will keep you posted on this chart!

Figure 3. SP500/ weekly

Rydex Market Timers: More Normal

When we last visited the Rydex market timer a couple of days ago, we had the assets in the bearish and leveraged funds greater than the bullish and leveraged funds, and this typically is a bull signal. We also had the assets in the Rydex Money Market Fund at a very low level, and this typically is a bear signal. This was quite an unusual finding in the 9 years of data that I have. When there are more leveraged bears than bulls, we will see fear in the market as traders move to the safety of the money market fund. The assets in the money market fund should be rising - not at a cycle low. I did not interpret this set of circumstances as those greedy bears. I called it a mixed short term sentiment picture. Nonetheless, da' bulls won out, which is not surprising.

Now here we are several days later and we find 1) the major indices are back near their highs; 2) on diminishing volume as prices clawed their way back to those highs; 3) with negative divergences starting to appear between market breadth and price. Prices are essentially at the upper end of the trading range that I have been writing about for the last couple of months.

Wasn't it only a week ago that most pundits were calling for a 10% correction when in reality the indices were only at the bottom of that trading range? Let me repeat the words that I have been writing for over 4 weeks now:

"It will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market."

Now we have the bullet proof market as long as the Fed remains complicit in crushing the Dollar. Now the talk isn't of a 10% correction but how great everything looks. However, if we interpret the data consistently, very little has changed with the exception that the indices are now at the top of their trading range, and they got their with very little sponsorship.

Oh, one other thing has changed: the assets in the Rydex bearish and leveraged funds are no longer greater than the assets in the bullish and leveraged funds. While the bull to bear ratio is not extreme (for example greater 2 to 1), the amount of assets in the Rydex Money Market Fund remains very low. So this is the relationship one would expect to see: increasing bullishness with diminishing fire power or assets in the money market fund. That's a more normal relationship.

Figure 1 is a daily chart of the S&P500 with the amount of assets in the Rydex Money Market Fund in the lower panel.

Figure 1. S&P500 v. Rydex Money Market/ daily

Figure 2 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds.

Figure 2. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily

TIPS: A Good Thing!

I first mentioned Treasury Inflation Protected Securities or TIPS in an article on August 28 when I noted that "the TIP's ETF has "broken out" as it appears to be attracting the interest of investors." Since that time, the i-Shares Lehman TIPS Bond Fund (symbol: TIP) or TIP's ETF is up 3%.

Figure 1 is a daily chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) with volume bars in the middle panel and the on balance volume indicator (with a 40 bar moving average) in the lower panel. On Monday, price hit a new closing high for the move, and the OBV indicator is leading price higher. This is good.

Figure 1. TIP/ daily

So you say, "So, what is the big deal?". The S&P Depository Receipts (symbol: SPY) is up 6% over the same time frame.

As it turns out, SPY is twice as volatile as TIP, and in the current market environment, my money management strategy would be to hold a position in TIP that is twice the cash value of the SPY. So in essence, with this position in TIP, I have not underperformed.

Furthermore and to the benefit of my portfolio, TIP is poorly correlated with the SPY on 156 week, 52 week and 26 week time frames. A position in TIP has not hurt my portfolio performance, and in all likelihood, it has decreased the volatility. This is a good thing!

Figure 2 is a monthly chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP). A monthly close below the pivot at 102.75 would be reason enough to abandon the notion of higher TIPS. TIP looks like it has the potential to get to $110.

Figure 2. TIP/ monthly

To find other articles that I have written on TIPS, use the search function in the right hand column of this blog. Type the word "TIPS" into the box.

A Third Reason To Own Crude Oil

We had two reasons to own crude oil, and now we can add a third.

Figure 1 is a weekly chart of a West Texas Crude Oil (cash data). The indicator in the middle panel measures crude oil's 52 week performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. Priced in these currencies, crude oil is out performing, and it is far from extreme.

Figure 1. Gold v. Currencies v. Sentiment

The data in the lower panel comes from the Market Vane Corporation, which publishes the Bullish Consensus. The current value is 44 meaning that only 44% of advisers are bullish on crude oil; peaks occur when the value is above 80%. When I last showed this data, the value was 39% when crude oil was 10% lower.