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Index Wrap

Unravel may be too strong a word

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The word unravel may be too strong a word to describe today's trade in Treasuries and equities, but suffice it to say, both were lower, but stocks looked to extend losses as Treasuries reversed early price gains to finish lower on the session, with yields jumping higher on the session, and igniting concerns that that higher yields will have negative impact on the U.S. economy.

Economic data released during today's regular session was met with mixed emotions. The services sector, as depicted by the July ISM Services Index, continued to show expansion in July with a 65.1 reading, which was well above economists' forecast of 58.0 and Junes 60.6 reading.

However, some economic data released by outplacement firm Challenger, Gray and Christmas, showed a resurgence in layoffs by corporations in the July, giving further insight that as long as corporations continue to layoff workers in an effort to control costs, then further increases in consumer demand becomes limited as more of the nations workers head for the unemployment lines.

Combine today's Challenger report with the benchmark 10-year YIELD ($TNX.X) jumping higher by 12.1 basis points to 4.441% and threatening to challenge Friday's 52-week high yield of 4.592% after a lackluster response to one of the first in a three-part refunding of 3-year notes showed bond traders not overly eager to take on new supply coming to the market.

True, it would make sense that Treasuries might find some selling with new supply coming to market, but bid ratio of 1.32 time the amount offered, when compared to the 1.96 bid-to-cover ratio found at the last auction in May, either hints there is less interest among fixed income traders for bonds priced to YIELD 2.36%, which were auctioned at 2.422%, or there is a large group of Treasury bond traders carrying a grudge against the Fed after past comments that the Treasury might look to buy back longer- term dated maturities, has left some painful bruises among bond bulls that got caught holding the bag when the Fed began to renege on such a scenario.

If you were to ask me, it's a little of both, where some bond traders may be weighing the more attractive backup in yields against some jawboning by the Fed in recent months, that put a bad taste in some bond bull's mouths, where they become more hesitant, instead of eager, to participate in a Treasury auction.

In today's 01:00 PM EST intra-day update, we looked at both the 10-year YIELD ($TNX.X) chart along with the S&P 500 Index (SPX.X) 965.46 -1.76% chart with their WEEKLY and MONTHLY pivot analysis retracement overlaid.

While the charts shown in the 01:00 PM EST update were not captured at the identical moment, there was negative impact seen in equities as the 10-year YIELD rose above 4.403%, the 4.427% into its close.

It would be notable too that the U.S. Dollar Index (dx00y) 95.86 -0.33% held in positive territory, or near unchanged levels for the bulk of today's session. That is, until the 10-year YIELD made the move above its WEEKLY pivot of 4.403%.

Here's a quick look at my U.S. Market Watch screen. It's not the first time traders have seen a screen covered in red among the equity portion, in fact, years past, we've seen this when Treasury YIELDS have been lower in defensive buying. However, things change from time to time and adjustments must be made, and there would appear to be a greater focus that higher Treasury YIELDS are indeed becoming a concern as long as the labor market continues to experience fits and starts toward recovery.

U.S. Market Watch - Major Indices/sectors

One, maybe two major things stand out in my U.S. Market Watch that I keep on one of my computer terminals during the day. Higher YIELD and lower equities, with further tie being made between financial sectors and both the Dow Jones Home Construction Index (DJUSHB) 407.92 -1.54% and PHLX Housing Index (HGX.X) 276.14 -1.98%. Another indicator I'd make note of today is the move higher in both the Market Volatility Index (VIX.X) 24.11 +6.44% and NASDAQ-100 Volatility Index (VXN.X) 34.23 +4.83% where sentiment certainly took a hit today.

Normally, I do not make note of a daily increase in the market volatility gains on a down day, as it would make sense that there would be more put buyers than call buyers when equities decline, but in recent months, traders may have noted that down days for equities have actually found either both or one of the volatility indexes also lower, perhaps depicting a market more willing to sell puts (long or naked) during a decline. Today however, the VIX.X CLOSED at its highest level since May 1 and I would interpret this as a shift in sentiment becoming present, with the shift toward BEARISHNESS.

Here's a quick look at tomorrow's pivot analysis matrix, then we'll move onto the chart of the major indices.

Pivot Analysis Matrix

In pink, I have the S&P Banks Index (BIX.X) 298.02 -1.45%, which has been leading lower in the WEEKLY matrix levels standing more firm today and tomorrow's DAILY S1 is very close to Monday's low. Take note of this as it could be an early support level tomorrow and an equity-based sector to tie in with any early-morning Treasury YIELD action.

Here too, I've highlighted in pink the 10-year YIELD's WEEKLY pivot of 44.03, or 4.403%.

One reason a trader might follow the YIELD/Bank trade early tomorrow morning is that there was a negative reaction to Cisco Systems (NASDAQ:CSCO) $18.86 -2.07% after-the-close earnings announcement, which has the stock falling to $17.80 in extended hours. While the company beat estimates by a penny, there was some concern that the company was buying back stock in order to beat estimates (I don't have a problem with this, CSCO has used stock to make acquisitions, when acquisitions pay off, you can buy the stock back), but larger issue of concern was given to cash flow generation not being at rates of growth as in the past.

I would not want to make the "blanket mistake/assumption" of simply rushing in and buying equities on a lower YIELD trade, if at the same time, banking stocks and even home builders were getting crushed to the downside. Though homebuilders are not in the pivot analysis matrix, this is a group that under an economic recovery mode, should benefit from a lower YIELD, which at this point, would only be found (in my opinion) if the back up in YIELDS suddenly become attractive, as an alternative asset class to stocks. I think traders/investors have to monitor the relationship between bonds, homebuilder/banks, and then broader equities as if we're trying to fly a plane. Tow hands on the wheel, and using both feet on the pedals to control our pitch and inclination/declination. (I'm not very good with airplane terminology, but understand that it takes three appendages to fly one).

It's notable that both the NDX/QQQ traded their WEEKLY R2's and closed below those levels. Correlative resistance early in the Q's at WEEKLY S2 and DAILY Pivot. In after-hours trade, the QQQ is ticking by at $30.20, with after-hours low being $30.10. While I don't know the exact time CSCO announced earnings, in this evening's Market Monitor, Jim Brown, who is usually eagerly awaiting key earnings/economic headline numbers posted the headline number at $16.07. The QQQ was trading $30.40 at that time.

Bear Confirmed for NDX/QQQ!

Today's trade saw the NASDAQ-100 Bullish % ($BPNDX) see a net loss of 3 stocks to point and figure sell signals and now has the DEFENSIVE team on the field as the bullish % falls to 70%, breaking below the July 1 bullish % relative low reading of 74%. While short-term rallies can occur, traders should take a more defensive/bearish approach to their trading and internals weaken.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval

New high/new low leadership sill present for the bulls, but the reversal into "bear confirmed" status at these high levels of bullish % should have resistance formidable back near the WEEKLY pivot. CSCO earnings are often thought to mark the end of major tech earnings season and pre-announcement season begins for future quarters. I've established a preliminary downward channel with in the QQQ chart, and while it is slightly steeper than the channel I had drawn from more simple trend in last night's Index Wrap, the regression channel does lend itself to trading from the July 14th high, with brief violations shown above and below the channel. It should not be assumed that the QQQ/NDX is WEAKER than the other major indices simply because it has broken below WEEKLY S2. Note today's QQQ close relative to its July 1 low.

To trade bullish near-term, would want to see at a minimum, the 10-year YIELD ($TNX.X) back below 4.40% with banks/homebuilders either firm or higher.

Still Bull Correction

While the narrower NASDAQ-100 Bullish % ($BPNDX) reverses into "bear confirmed" status for the first time since January, the broader S&P 500 Bullish % ($BPSPX) remains in "Bull Correction" status. The S&P 500 Bullish % saw a net loss of 2 stocks to point and figure sell signals today as the bullish % slipped 0.4% lower to 74.8% and its lowest level of bullish % since reversing into "Bull Correction" status at 76% on July 22 from its bull cycle high reading of 82% in mid-June.

S&P 500 Index (SPX.X) Chart - Daily Interval

If my thinking of one-and-a-half step backward and one step forward thinking is to be correct from last night's Index Wrap, then it is going to get a good test tomorrow. S&P futures (sp03u) currently look as if the SPX.X would open just below WEEKLY S2 of 962.10, where we would then see Stochastics reach "oversold" levels. I'd be looking for a lower YIELD and a bid in the S&P Banks Index (BIX.X), which did hold above yesterday's lows (the SPX didn't) as a sign that the SPX might find a rebound in the making on a move back above WEEKLY S1 of 963.10 with a trade at 965. If SPX triggers long at 965, the first test of resistance from there would bee the DAILY Pivot and WEEKLY S1 correlation at 971.

S&P 100 Index ($OEX.X) Chart - Daily Interval

OEX chart is once again similar to SPX. Additional notes not discussed in SPX is negative development from MACD moving below zero. This is first time MACD has moved below zero since December 18th. At that time, OEX had just broken below a rising 50-day SMA of 455, did trade lower at 440 before rebound back to falling 200-day SMA of 475. While the past is no guarantee of the future, I would PLAN form similar action near-term, but look for resistance to be building back near 500.

Today's trade saw the narrower S&P 100 bullish % ($BPOEX) see a net loss of 1 stock to a point and figure sell signal. This has the bullish % slipping back to 81%, but still needs a reading of 78% to reverse into bull correction status, similar to that found in the broader S&P 500 Index.

Dow Industrials (INDU) Chart - Daily Intervals

A bearish trader like myself that may not have a bearish index trade on at this point, might want to have the INDU as the index to trade bearish should selling continue to unwind in the bond market with YIELDS breaking to new highs, that then finds the SPX/OEX along with banks moving sharply lower. While risk back to 9,300 resistance seems large in point, terms, it is less in percentage terms (about 3%). A bearish play in the Dow looks to be a bearish trade where a bear is playing a lagging affect on weakness in the SPX/OEX, but similar oscillators as the NASDAQ- 100 Index.

The biggest question for the bond trade at this point is the rather aggressive trend higher in YIELD, should it continue to unwind, most likely would have the major equity indexes all being pushed lower.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and remains "bull correction" status at 80%.

I'm continuing to keep a bearish eye on Intl. Business Machines (NYSE:IBM) $79.85 -1.57% as it now trades right at its June 6th and June 9th relative lows of $79.84 and $79.81 respectively, after just recently being one of the Dow stocks to generate a double-bottom sell signal at $81 on July 30.

I'm also keeping an eye on Merck (NYSE:MRK) $53.51 -1.14%, which also just gave a reversing sell signal at $54. I would think MRK being a drug stock might find some defensive support near-term, but we will see as the stock has really seen selling from the $61 level. However, if the stock does firm and trend higher, then action might depict that of a market also becoming a little more defensive.

Jeff Bailey

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