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No break for the bulls

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While the U.S. dollar as depicted by the U.S. Dollar Index (dx00y) 106.75 +0.22% is trying to put together two successive days of gains against a basket of foreign currencies, equity bulls are seeing cash flow right back into Treasuries and seeming pass up on equities today.

That has the more out of favor NASDAQ-Composite (COMPX) 1,366.75 -2.63% breaking to new 52-week lows and coming very close to violating the October 1998 low of 1,357.09. While bears are undoubtedly wearing a big grin today, complacency in their trading and account management should not be an option. As amazing as it may seem, after the NASDAQ Composite traded 1,357.09 that fateful day in October of 1998, a bull rush of biblical proportions took place as the NASDAQ Composite turned higher from there and put together a rally to the 2,500 level (+84) over a brief 5-month period. As ludicrous as that rally appeared, the follow through run above 5,000 over the next 18- months was yet again spectacular.

10-year YIELD Chart - Weekly Interval

This morning's break back below the 4.801% YIELD level on the benchmark 10-year YIELD ($TNX.X) hinted that investors were going to be more defensive toward equities today and stocks have suffered the consequences of cash rotating back into Treasuries, despite some firming in the U.S. Dollar where past weakness has weighed on equities.

It's interesting to note at the far left of the above YIELD chart (October 1998) how YIELD did jerk higher from the 4.1% level as bond investors sold this bond with some abandon and the cash rotated to equities.

For now, equity bears would love nothing more than to see cash continue to rotate to Treasuries and pass by stocks, but the potential reverse head and shoulder pattern developing in the 10- year YIELD chart at least has an equity bear's attention.

With the U.S. Dollar trying to firm a bit, the last thing an equity bear would want to see (in my mind at least) is a rebound in the U.S. Dollar, coupled with selling in Treasuries. That type of action then has stocks being the potential recipients of cash, which could find stocks rebounding.

In recent sessions, we've noted weakness in the Gold/Silver Index (XAU.X) 72.71 -3.31%. While the sector did rebound some yesterday, the group is back under some selling pressure today. Many equity bears felt that gold stocks would be the on group of stocks to show bullishness as the U.S. and world economy's collapsed. Today's bearish action in Gold should also have a bearish equity trader's eye. A true "defensive" response should have been for gold to have a follow through bullish session today.

Jeff Bailey
Senior Market Technician
Option Investor

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