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10-year YIELD pegs the 5.0% level

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I'm once again running late with today's update, and as I right this update, the bond market is closed and the 10-year YIELD has pegged the close with a 5.0% YIELD. Today we did see selling across the major maturities so equity bulls look to be back in the ballgame and perhaps the offense is suiting up on the sidelines as cash continues to be freed up from the Treasury market that could be slated for stocks.

10-year YIELD chart - Daily Interval

In recent commentary I felt a move above the 5.0% YIELD level might raise some eyebrows. While I "captured" the above chart just before the close of the bond market, the YIELD on the 10- year did settle exactly at 5.00%. Something is about to break here, but unfortunately we don't know what direction.

If the past is any indication (see pink circle on chart) we might expect a pop in YIELD tomorrow, some sideways action and then a break back lower caused by buying in Treasuries that could have stocks under further pressure. However! DIVERGENCE from the past is what equity bulls are looking for and this is where option traders may be looking at some "neutral" option strategies by where they aren't making a bet on direction, but only looking for some volatility.

Right now implied volatility is going to be high due to recent option expiration, which should begin to subside over the next day or so. This higher "implied volatility" is cause by the "rolling" of option contracts from January expiration to February expiration and that volatility will jack up some option premiums in some of the more volatile NASDAQ stocks.

In addition, there is also time value to consider. For now, it is not the best time to be implementing straddles or strangle trades on higher volatility tech stocks due to the inflated premiums in the options, but that doesn't mean some listed stocks (NYSE) might not be a place for traders to be looking for those traders trying to play the "uncertainty" of just what way Treasury YIELDS may break at what could very well be a key PIVOT point in the 10-year YIELD.

One stock I'll start running some numbers on is share of AOL Time Warner (NYSE:AOL) $28.46 +0.17%. Volume has been heavy today with some sizable block trades. The stock did trade a new 52- week low today and that will only add to the "uncertainty" and perhaps create some good volatility.

As it relates to Treasuries, the current action is near-term bullish for stocks in my book. While the stock market did seem to remove some "excesses" from recent month is the past week or two, the bond market didn't seem to flinch that much on the plethora of earnings and economic data released lately. I think I said before that any shorting in the current market environment wasn't going to be a "cake walk" for the bears and today's bond market action has had stocks holding onto gains.

Those that can review today's market monitor may be able to find some bullish trades they're comfortable with. We're not all that bearish and still putting out some ideas with a bullish tint.

Jeff Bailey
Senior Market Technician
Option Investor

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