Despite the ample support markets are receiving from the algos (witness yesterday’s knee jerk reaction to VIX’s smackdown) our yield curve model continues to sound the alarm for equities.
The only question is how long the delicate equilibrium can be maintained. Rates can decline for many reasons. When due to central bank easing, for example, stocks tick gleefully higher. When it’s a response to fear, on the other hand, we can expect additional equity market instability.
As the 10Y approaches our next downside target from Dec 26 [see: Update on Bonds] it would be wise to consider why rates are declining this time.
Of course, the decline has been postponed repeatedly over the past 4 1/2 months.
But, the bond market has a great memory. It isn’t as easily fooled as equities.
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