Treasury yield plunge looks bullish for Equities
- SPX reversal looked important given yield reversal. Above 4060 adds conviction
- Sentiment has turned quite negative in the short run given elevated Equity Put/call ratio
- Treasury shorts per CFTC have now hit the highest levels since late 2018
The sudden reversal seemed to catch many off guard at a time when many were convinced that Equities and Treasuries had begun new bear trends. The sudden About-face in Yields looked particularly negative technically for 10 and 30-year Treasury yields, while Equities reversed sharply off their lows, with SPX gaining over 50 points off the lows coinciding with this rollover in Yields.
Overall, SPX requires a move back over 4060 along with TNX getting under 3.84% to have real conviction that a larger rally is upon us. That has not yet happened.
However, the combination of sentiment having become suddenly much more bearish on recent economic, geopolitical, and policy events makes a bullish stance necessary as February nears conclusion.
As discussed previously, SPX has failed to break down sufficiently towards thinking this bull market rally from last October has run its course.
Technology continues to strengthen, and given Semiconductors recent lift, this looks very good for additional outperformance from this sub-industry. SOX in particular managed to lift back up over early February lows former support now resistance) making it likely that further gains are forthcoming.
Aside from rates starting to rollover, Copper also broke down to multi-day lows, and likely is en-route to a decline under $3.85. Precious metals weakness should be nearing conclusion, and I expect a rally back starting in March in the base and precious metals.
As shown below, the horizontal green line marks the key area of importance for SPX heading into next week. Any ability to close back over 4060 is a “green light” for additional rallies, and SPX likely should exceed 4200 and push towards last August’s highs near 4325. Only a decline under 3945 would be cause for possible concern, but I am using 3900 as indication that this bounce might require further consolidation. At present, rallies look more likely.
Treasury Yield trend violation likely means Yields are peaking out, which should be bullish for Equities
US 10 and 30-Year Treasuries look to be peaking, and Thursday’s decline down under 3.87 managed to break a minor 3 week uptrend in yields. While a move down under 3.84% would serve to add more conviction, this seems particularly positive for Equities at a time when many are convinced that yields should immediately go back to recent highs.
As discussed last week, Treasury yields should be near their peak, and cycle composites show a negative trend for TNX between late February and April.
Breaking 3.84% in yields will be quite helpful towards thinking risk assets should begin to resume their recent rally, and this will be a level to watch in the coming days/weeks.
Equity Put/call ratio hits the highest levels of the year
As of Wednesday’s close, the CBOE Equity Put/call ratio has just moved to the highest levels of the year, and registered a reading of +0.80.
While I generally do not make a big deal of any readings under 1.0 on the upside, or above +0.50 on the downside, this spike directly coincides with the recent narrative shift from last week about the economy proving to be much stronger.
Other gauges of sentiment like AAII have reverted back to showing more Bears to Bulls in their weekly poll and confirm some other data which argues that this market pullback has not gone unnoticed, and is serving to make the investing public more bearish.
Treasury shorts have also reached the highest levels in years based on CFTC Large Speculator Futures
Interestingly enough, outside of bearish sentiment for Equities, CFTC data also looks to have turned bearish on the Treasury market, with “Large Speculator” net Futures having reached the highest levels of bearishness since late 2018 over four years ago.
Given that commercial Treasury positions are firmly in positive territory while “large Speculators” are the most negative of years, this suggests that it’s difficult to bet on much higher rates when everyone expects it.
Furthermore, my cycle composite for Treasuries shows prices rallying sharply between now and April (Yields falling).
Thus, an upcoming reversal looks likely for TNX and TYX, and upside looks limited for yields.
