Why a Lower 10-yr Note is Bearish

It does get tiresome, the talking heads blathering on about the signals being sent by the bond market — whether lower rates reflect a better economy, worse economy, or simply Fed tapering.  The bottom line?

As we pointed out way back in December, a plunging 10-yr has correlated with lower stock prices ever since Jan 2000.  The chart below reflects the two big declines — 48% and 52% — associated with TNX’s reversals off the white channel top in 2000 and 2007.

2014-05-19-TNX v SPX w notes

I wondered months ago whether we might get back up to the top of the channel by May in order to catch its intersection with the yellow .618 at 38.18.  But, a casual glance reveals that ship has probably sailed.

Since last departing the white channel top in 2007, the tops have come instead at the falling trend line (dashed yellow.)

2014-05-19-TNX v SPX CU

While not as spectacular as the declines at I and II, the declines at (a) and (b) were pretty significant at 15 and 20% respectively.  TNX even traced out a third derivative — the steeper yellow trend line that produced drops in SPX of 10 and 9% (1 and 2.)

TNX got back up to the trend line off of 2007 on September 5, 2013 — at which time stocks might have reversed had not a series of ramp jobs and coordinated dip buying kept them inching higher.  On Dec 18, the day SPX spiked higher on news that the taper would in fact occur (the most bizarre PPT action in recent memory) TNX actually popped up above the yellow TL, only to fall back below it two weeks later.

2014-05-19-TNX daily CU

Since then, it has managed to leak lower as stocks (but, not the SPX or DJIA) have stumbled.  It was badly damaged by the death cross on Apr 2 and plunged through the red channel midline (red, dashed) a few days later.  Note that the midline is highly evocative of the necklines on NKD and USDJPY.

Last Thursday, it found support at the TL (purple, dashed) connecting the July and October 2013 lows — although it briefly dipped below the October 23 low.

It wouldn’t surprise me — especially if USDJPY gets a good bounce off its SMA200 — to see TNX also bounce higher, perhaps to close the May 14 gap at 26.11 (also the SMA20 in a day or two.)  But if it dips below 24.71, the downside should be significant — to TNX and to stocks.

For the record, I don’t believe much lower rates — if they arrive — will be driven by supply and demand, higher or lower GDP, etc.  I think they’ll be driven by a flight to safety as investors flee a stock market meltdown.

Comments are closed.