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Treasuries starting to see some buying

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Today's action in the Treasury market gives hint that some market participants may be getting a little more aggressive with their buying in this segment of the market. Right now I'm watching the 5-year YIELD break below a recent 1-month consolidation top and head lower. I don't view this as a BIG negative for equities right now, but it could very well be a sign that cash is beginning to opt for bonds near-term. This action could dampen bullish equity moves higher should it continue.

5-year YIELD Chart - Daily Interval

The first sign of real trouble in my book for equities would be the 5-year YIELD ($FVX.X) dropping back below the 4.187% level. With MACD still trending lower, I'm expecting some type of test of the 4.187% level. If YIELDS can firm up there, then that may give us hint of just how the market is weighing the risk/reward between a rather "safe" bond YIELDING 4.2% or the upside growth potential of stocks. Current action is that the MARKET is preferring a 4.26% YIELD.

SPDRS (AMEX:SPY) Chart - Daily Interval

Retracement from the all-time high to recent low marks the range. Just as the S&P 500 Index (SPX.X) has found resistance at $1,175, it is a mirror image of the SPDRS at our retracement of $117.46. I might just call this the "prove it to me trade." If the economy is as strong as some believe, then a bearish trader will get stopped just above $118. I'm wondering where they are going to find the cash if money is rotating to bonds. Thus my bearish posture this morning in the SPDR trade.

If the 5-year YIELD were to firm near its 50-day MA and the SPDRS are trading at their 50-day MA of $114, a bearish trader in the SPDRS could always close the trade for a small profit. However, if we get a continuing bullish bias in the bond market that drives YIELDS lower and begins to starve the stock market of cash, then a decline to $110 may help fill the belly of a hungry bear.

Jeff Bailey
Senior Market Technician
Option Investor

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