Option Investor
Market Updates

Don't get so focused on bonds you forget about your trade

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I want to stress to readers that I make different observations in the market and try to explain the dynamics of how these events may affect the broader market. What I want to stress right now is that every trader should trade his/her own security on its own merits. If the trade is working in your favor, then great, but if it is moving against you, even though other observations say it shouldn't be, don't try and prove yourself right by letting the trade get away from you. Even though bond yields are down today, what is the correlating index we've been using against bonds doing? What is the Gold/Silver Index (XAU.X) doing? It's leading the sector loser category today (down 2.34%) and this type of activity is NOT a big negative for stocks!

5-year note YIELD chart - 60-minute interval.

Earlier this morning on IndexSkybox.com I pointed to the 5-year note yield when it was resting right on the 50-period MA (thin blue) at 48.21 (4.821%). This note then experienced selling and the yield jumped. Not long after, some of the broader equity indices turned green. This is a very short-term observance, but it does seem like the market is watching bonds closely.

Portion of trading station

The above is a portion of my index screen that I keep an eye on. I've grouped the XAU.X along with the 3 major bond yields we talk about just so I know what everything is doing in a single glance. It's pretty easy to see what stands out here. It's the 5-year bond yield rising. Is this the beginning of a trend? If so, we're alert.

NASDAQ Composite Index Chart - 60-minute interval.

The NASDAQ Composite (COMPX) is still holding above the 2,725 level and still looks bullish. Traders that may be trying to short this index, or even the QQQ's, without a breakdown occurring on a chart, could be asking for trouble. Better to wait for the break.

Are observations being confirmed?

If you're seeing bond yield drop and think that stocks should follow, are these observations being confirmed? Right now I'd say NO as it relates to the NASDAQ Composite. It might be very true as it relates to VeriSign (NASDAQ:VRSN) or other stocks, but understand that a broader market index like the NASDAQ Composite has yet to be affected.

Jeff Bailey
Staff Analyst

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