Chances are you're not going to see this headline "Stocks firm as 5-year YIELD achieves vertical count" on any other financial news source today, but it is the only explanation I have that explains this morning's firming in stocks.
In this morning's market monitor I was discussing the vertical counts on Treasury YIELDS in both the 10-year ($TNX.X) and 30- year ($TYX.X) and finally the shorter-term 5-year ($FVX.X) and realized the 5-year YIELD ($FVX.X) has achieved its "bearish" vertical count for YIELD (would be bullish count for price of the bond). This had me issuing a YIELD alert on the 5-year which might trigger some institutional buy programs for stocks on a potential near-term asset allocation shift. The thinking being that some institutions that may have implemented an asset shift away from stocks earlier this year and rotated the cash generated from selling equities toward Treasuries (specifically the 5-year Treasury) when its YIELD was higher. This morning's achievement of its "bearish" vertical count could then trigger some other asset allocation models away from the 5-year (lock in gain on price) and toward stocks which have fallen substantially in recent months.
5-year YIELD Chart - 0.50 box
This morning's low YIELD on the 5-year came at 3.235% (32.35 as it relates to the above chart) and right near the opening for stocks. Since that time, the 5-year ($FVX.X) has seen some selling and has YIELD recovering to the 3.4% level, with session YIELD high being 3.41%.
This may have had some computer programs at institutions set for a some Treasury selling at the 5-year maturity at the 3.3% level and have some cash rotating toward stocks.
As it relates to trend on the above chart, we can now see how the 5-year YIELD chart broke upward trend in about mid-May at 4.40% (44.00 on the chart) which also put this YIELD on a "sell signal" (a buy signal for the price of the bond) and resulted in the bearish YIELD vertical count calculated. While bullish and bearish vertical counts can always be exceeded (or never achieved), this mornings selling in the 5-year YIELD and resulting firming of stocks hints that there may have been some institutional asset allocation models triggered.
This type of action takes ongoing monitoring, but may have some equity bears suring up some profit stops. Especially in stocks that have achieved or exceeded their own bearish vertical counts!
Later today I'll discuss the bearish YIELD vertical counts on the 10-year and 30-year Treasuries, which still have some downside room to their YIELD objective.
However, as discussed before, the shorter-dated maturities represents LOWER risk investments as it relates to time. To put yourself in the mindset of maturity try to forecast next hour's market averages, then step out 90-days from now, 2-years, 5- years, 10-years and the 30-years from now. What you will then understand is, as you go further out in time, your forecast becomes more "suspect" or "risky."
With that understanding, we then think of the 5-year YIELD as "more certain" or less risky than the 10-year and 30-year. While I often talk about the benchmark 10-year YIELD in daily commentary, we should also keep close eye on the 5-year with the thought it is "less risky" that the 10 and 30-year. With that understanding, early morning selling in the 5-year could become an important observation over the next week or so. If a "buy signal" is eventually generated on the 5-year YIELD, like that found back in November (after red B), it could confirm some type of move higher for equities.
As it relates to "equity risk" a trader/investor could well compare the "red B" on the above YIELD chart to what the Bullish % charts were perhaps "saying" at that same benchmark on the bullish % charts.