By Skill Analytics
I’ve been a big fan of watching the 10-year yield for some time – and I think what is happening right now is very interesting. If you think that stocks are overbought and due for a pullback (something that I also believe), it is hard to square that with what is happening in the 10-year treasury yield right now.
So let’s take a look: (Click to enlarge)
In the top pane we have the 10-year treasury yield. As you can see, we’ve had a breakout above a forming base which would seem to indicate that yields may be heading higher this year.
The bottom panes show the relative strength of different markets such as SPY/IEF, EEM/EFA, SPY/DIA, SPY/IWM, SPY/QQQQ and SPY/GLD. What’s apparent here is that large cap strength continues to grow across the board, perhaps indicating a large shift in assets into large caps stocks and into developed markets vs. emerging markets. We can also see that while SPY is outperforming DIA, that outperformance is in decline. Overall, I think what we’re seeing here is a shift in moving away from risky assets to less risky assets.
GLD continues to underperform although I am watching it closely right here as it is still, technically, in a bull market. Commodities – particularly copper (JJC) and sugar (SGG) (not shown here) continue to do well.
(Click to enlarge)
Now let’s take a look at $TNX on a longer time frame – above, monthly back to 1990. The downward channel is obvious, as is the higher lower that has happened recently. I think if yields were to exceed the top of that channel – somewhere north of 4.35% – we’re likely to see a mass rush out of bonds.
Getting back to the shorter term, with Treasury yields breaking out, I think we’re obviously seeing a move away from longer term bonds (IEF, AGG and TLT all look terrible) and into equities. Yet, at the same time, we have a shift from the Nasdaq and small cap stocks into large cap stocks.
Given that the overall market does better, in my studies, when the Nasdaq or small caps are outperforming, I’m not sure that we’ll see great performance out of the broader market, even given the shift from bonds. The question, to me, is this: If stress comes to the market, where will assets shift to? Will they flow back to Treasuries? If they did not, to me that would indicate a decline in confidence in the U.S. bonds – perhaps the first change in the view of U.S. debt in a long, long time. As always, questions/comments welcome!