Big Picture: Sep 9, 2014

Continuing the theme began yesterday of big picture items, we’ll take a quick look at interest rates.  The 10-yr note was another of those bearish charts from earlier in the year.

While the talking heads insist that lower rates would be a good thing for stocks, the chart shows otherwise.  Reversals from tags of a falling white channel as well as the yellow dashed trend line led to stock sell-offs, as the chart from March clearly shows [see: Eye Candy for Bears]:

2014-05-19-TNX v SPX w notes

As we anticipated, rates did, in fact, decline from the start of the year.  Yet stocks have done anything but follow along.  What gives?

2014-09-09-TNX 60 0600

Rates can decline for lots of reasons.  But, the chief reason for the highlighted past declines was fear.  As markets were perceived to become riskier, money at the margins flowed from equities into bonds and notes — bidding u prices and driving rates down.

If investors have learned anything from the past year in the “markets,” it’s that there is nothing to fear.  Each (successively smaller) dip has been aggressively bought. Margin debt and complacency are at extremes.  And, long-short hedge funds have stopped shorting all together.

Time will tell whether the relationship between TNX and SPX that dates back to 1998 is broken, or simply hasn’t played out yet.  With QE ending next month, I tend to think the latter.

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Today’s initial sell-off reinforces our downside case — but, only if prices move through a critical level.

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