I've said before that some of my "best" or most profitable trades have come from DIVERGENCE. Unless traders and investors have had their heads in the clouds the past couple of years, the BIGGEST DIVERGENCE in the markets has been between stocks and bonds.
For any equity bull to be overly bullish in stocks, then I think that equity bull most likely either needs to be bearish in Treasuries, if not at least monitoring them for a sense of how eager other market participants are to relinquish their hold on the perceived "safety" these instruments have held.
I think any equity bull looking for a bottom in stocks, wants to see a top in Treasuries.
With the 30-year Treasury Bond being the "riskiest" yet highest YIELDING bond, this would be the first place I think an equity bull would look for meaningful selling.
I think this chart with retracement attached to the December 30- year Futures (us02z) defines a broad range this contract has traded. If an equity bull is looking for a bottom in stocks, then I think this would be the first bond to show some sign of a top.
U.S. Treasury Bond (us02z) Chart - Daily Interval
Before I could "call a bottom" in stocks, I'd have to "call a top" in the 30-year Treasury. There are signs that the 30-year may have reached its top as this bond's futures contract has been finding resistance near the 115 level since 09/24/02, while the major market equity indexes have been setting lows, or at least showing lows. For the most part, the 30-year treasury hasn't closed BELOW its 21-day SMA for two consecutive sessions since May 22nd.
Note: I've "inverted" my retracement to show 19.1% retracement at the TOP of the 30-year Treasury. This is just the opposite of what I've been showing for the major indexes we're following on their "fitted" retracement.
Simply using the 21-day SMA on the above chart, one could compare that against the S&P 500 Index (SPX.X) 800 +3.04% and its 21-day SMA of 835, S&P 100 Index (OEX.X) 403.68 +2.79% and its 21-day SMA of 419, Dow Industrials (INDU) 7,502 +2.95% and its 21-day SMA of 7,843 and NASDAQ-100 Index (NDX.X) 851.35 +4.93%, which is closer to its 21-day SMA of 859.
Current thinking here is... if the bond market doesn't sell of further, then higher risk for bulls is currently in the NDX.X on today's rally as it relates to the 21-day SMA. The ability of the NDX.X hints that bears are on the move and covering positions more aggressively, but that bullish capital that might come out of Treasuries isn't doing so at such a quick rate.
While I'm keeping a close eye on the financial near-term, I also want to get away from the equity markets and monitor the bond markets and their reaction to things. Since June 13th, the bond market has been on a roll and equities have suffered and before I get too bullish on equities, I'd like to see some type of reversal from that trend.
As a benchmark, on June 13th, the Dow closed at 9,502, SPX closed at 1,009 and NDX closed at 1,106.