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Allocation shift\?

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In this morning's OptionInvestor.com market monitor at 10:30 AM EST we issued a "YIELD Alert" for the 5-year Treasury YIELD ($FVX.X) after we discovered that this bond had reached its bearish YIELD objective of 3.3% from its point and figure chart with the thinking that traders might want to be on the alert for some type of asset allocation shift near-term.

At that time, the Dow Industrials had actually recovered from their lows of the session (7,533) to the 7,726 level and have since extended gains to a session high of 7,967.62 and currently trade higher by 141 points at 7,843.

We're alerting bearish trader to carefully check any bearish positions as it relates to their bearish vertical counts from the point and figure charts.

One example would have been an earlier alert to biotech-equipment stock Affymetrix (NASDAQ:AFFX) $15.46 +5.89%, which earlier this morning we alerted traders that the stock had achieved its bearish vertical count of $14.00. It's notable that the stock traded a session low of $13.80, but then appeared to benefit from the 5-year YIELD action and traded a session high of $16.23. That's a rather "substantial" move from $14.00 (15.9%) on an intra-day basis.

While today's action is near-term bullish for equities in that there appears to have been some type of asset allocation programs triggered when the 5-year YIELD ($FVX.X) 3.405% reached a potential lower YIELD objective, there is still a lot of work to be done before bulls get any type of feeling that a longer-term type of rally could take hold.

If we think of the longer-dated maturities as "riskier" then attention rolls from the 5-year YIELD action out to the 10-year YIELD ($TNX.X) 4.347%, which would still have a ways to go to reach its bearish YIELD objective of

10-year YIELD Chart - 0.50 box

A couple of weeks ago I mentioned that home owners looking to refinance a mortgage might call their mortgage broker and get the paperwork started and look to lock in rates should the 10-year YIELD reach its bearish YIELD objective of 4.15%, which might have mortgage rates falling to a level where we would look for a low.

Its understood that the Fed sets interest rates, but the MARKET sets YIELD rates which many mortgage rates are tied to.

As it relates to stocks and the broader market, you can see how the MARKET perhaps perceived some time of excellent risk/reward trade in the 10-year YIELDS back in mid-March (after red 3) and April (red 4) when YIELD reached a peak on this bond. Then gave a YIELD "sell signal" at the 50.00 level (5.00% on the bond) or a "buy signal" on the underlying price of the bond.

It's been very evident that stocks have suffered some great consequences since then.

It is further imaginable that today's recovery from 52-week lows for the major averages is some type of near-term asset allocation shift.

If we believe that Treasuries are "safer" than stocks (Treasuries are backed by the full faith and credit of the U.S. Government) then they are perhaps a very good security to monitor as it relates to stocks. In recent weeks, we've talked about the lower levels of the Bullish % charts which help us understand "MARKET risk" as it relates to equities. While we have yet to see the broader S&P 500 Bullish % ($BPSPX) show any signs of internal repair (stocks giving buy signals), we do understand the lower risk levels where we might see some type of asset allocation shift away from Treasuries into stocks.

S&P 500 Index Chart - 2% box

We can perhaps "tie in" the "red 4" on the S&P 500 Bullish % chart above to what we see in the 10-year YIELD chart at its "red 4". In essence, when the S&P 500 reversed into "bear alert" status at 70%, we saw a reversal from the eventual relative high in the 10-year YIELD, which in part may have confirmed some type of "asset allocation" shift which had cash rotating away from stocks and into Treasuries.

Today's action in the 5-year makes sense from a "YIELD target" perspective as the lower YIELD of 3.3% may be deemed "unattractive" as it relates to either the 10-year or 30-year or perhaps stocks!

Wal-Mart Watch

Traders should have perhaps identified some stocks that have achieved bearish vertical counts where they begin monitoring that list of stocks for bullishness. In the last couple of sessions, I've put shares of Wal-Mart (NYSE:WMT) $45.45 +0.88% on my list of stocks that might find cash rotating toward it under a potential risk/reward shift. We're continuing to monitor the stock for some consolidation as found back in September of last year at a relative low. Today's action still has the stock "in play," but a bull waits patiently for proper trade setup and measure Treasury YIELD action near-term. Things are looking up for the bulls near-term, but there's a lot of work to be done.

For bears, it becomes rather imperative in my opinion that stocks we're holding short/put have plentiful near-term overhead supply nearby that could keep any type of rally in check, but still have enough downside present from the bearish vertical counts to keep bulls at bay and bearish traders interested in shorting the underlying stock.

Jeff Bailey
Senior Market Technician
Option Investor

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