Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Are we witnessing the peak of fear once again in the capital markets?

In what is becoming an almost quarterly ritual, investors are running for the hills as the fear of a European meltdown is driving down equity prices and hammering down yields on US treasury notes.

On May 17, 2012 the U.S. 10-Year Note Yield closed at an all-time low of 1.702%.

Will the global capital markets finally tumble into the abyss or will we step back from the brink once again, and see another unexpected relief rally?

We noticed something very interesting: the TLT (NYSEARCA:TLT) closed at 124.17 today.

Over the last 12 months any time the TLT has traded above 122 it has signaled the end of equity sell-offs (peak of fear) and the beginning of a new equity bull run.


(Click to enlarge)

Let's look at what happened to the SP500 on the two previous dates that the TLT traded above 122.00.

  1. October 4, 2011 - the TLT hit an intra-day high of 122.16 and the SP500 hit an intra-day low of 1,074. The SP500 rallied from this low and hit a peak high of 1,284 on October 27 for a gain of 19.5% since the 122 reading on the TLT.
  2. December 19, 2011 - the TLT hit an intra-day high of 122.43 and the SP500 hit an intra-day low of 1,202. The SP500 then rallied from this low and hit a peak high of March 26, 2012 for a gain of 17.8% since the 122 reading on the TLT.

On May 17, 2012 the TLT hit an intra-day high of 124.28 and the SP500 hit an intra-day low of 1,304.

An 18% bounce in the SP500 from this low (similar to the bounces that occurred in October and December) would bring the SP500 to 1,538.

Will this time be different or have we once again hit the floor for the yield on U.S. Treasury notes? That is, there is nowhere to go but up from here for yields, which in turn means that equity markets will also stop falling and we will experience a strong 'risk-on' rally?

If we do see a 15% to 19% rally in the SP500 over the next six weeks we will be able to officially name the TLT as the new Peak Fear Indicator for capital markets.

If no equity rally ensues and the TLT keeps climbing higher, and U.S. Treasury note yields keep falling, then something terrible is about to strike at the heart of the global capital markets.

The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

--W.B Yeats, The Second Coming

Disclosure: I am long SPY.

Source: The Peak Of Fear