The following commentary was initially published on May 13, 2011.
In April, we observed the development of a negative divergence between treasury yields and stocks. While the S&P 500 index moved up to a new long-term high in late April, the yield on the 10-year Treasury note returned to previous short-term lows. Since then, yields have moved down to new short-term lows as stocks have consolidated below recent highs of the cyclical bull market.
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This divergence is a warning sign that suggests the S&P 500 index has become vulnerable to the development of a potentially sharp decline and a confirmed break below power uptrend support near current levels would predict a relatively quick move down to long-term uptrend support in the 1,300 area. Additionally, the current treasury yield short-term cycle has an extremely bearish translation, suggesting that yields are likely preparing to move even lower following the formation of the next Short-Term Cycle High (STCH) sometime during the next several sessions.
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As always, there are no certainties when it comes to financial market forecasting, only possible scenarios and their associated probabilities. However, short-term technical and cycle analysis both suggest that stocks are vulnerable to an abrupt decline, so elevated caution is warranted at this time.