10-Year Yield (Bemchmark) vs. the Market

This post is sort of a follow up on today's earlier post, Gold is Telling Us Something . As noted in the post, "Gold is typically bought on inflation EXPECTATIONS", meaning before the trend on inflationary pressure starts. The F_E_D has two mandates, maximum employment and keeping inflation at their long term target rate of 2%. However, what happens if recent inflationary trends continue? As mentioned earlier today, despite best intentions and guidance, the F_E_D has no choice but to hike interest rates sooner than the market expects and that's one thing in the median forecast of F_E_D members that was amiss upon yesterday's release, the year end target for inflation for 2015 and 2015 were both higher than the previous meeting and the previous meeting was higher than expected.

As The F_E_D's unofficial mouthpiece, the Wall Street Journal's Jon Hilsenrath wrote yesterday, "The F_E_D's new interest rate forecast imply slightly more aggressive credit tightening plans taking shape, more than previously thought". 

Why do you think gold was up today, GLD +3.5% in the biggest single day move in 9 months, SLV (silver) jumped +4.57% both precious metals are a natural hedge against inflation. This morning around 8:24 a.m. someone bought a half a billion dollar's worth of Gold futures in a 1 minute bar (they did alright for themselves today). One day after the F_O_M_C and with the %USD virtually flat, we see this very strong reaction in inflationary hedge assets, the market is obviously (and I believe has been as we have been following gold miners) anticipating higher inflation and higher inflation when not accompanied by a robust economy is not good. Real wages are falling on a year on year basis, not even holding but falling. It seems the market took this to mean the F_E_D will have to act before the market had anticipated, I suspect that's why we had no follow through today (the concept of a strong move being confirmed the next day with another strong move), that and the knee-jerk reaction associated with F_O_M_C and F_E_D events.


While a discussion about interest rates, bonds/treasuries and how they relate to the market can be very challenging as there are so many dynamics, in looking at some very simple trends I've captured a few charts for you that might also be telling us something.

First I'm using the Yield of the 10-year benchmark Treasury, this is used to set all kinds of interest rates from car loans to 30 year mortgages. The important thing to remember is Yields move opposite the treasury itself so if a treasury bond is selling off it will see higher yields. As the price of the bond falls, higher yields are needed to attract investors, by the same token, demand for treasuries produces lower yields, it's pretty basic supply and demand, the more demand, the less the yield, when demand weakens, yields increase.

The other broad concept to remember is Treasuries have traditionally been a "Flight to Safety", when there's fear or concern about stock prices falling, investors will move in to the safe haven of Treasuries which has the effect of lowering yields as there's more demand for treasuries. There are some caveats that apply because of F_E_D QE and ZIRP (Zero Interest Rate Policy) which the F_E_D Funds rate is near at 0.10%, it's basically the lowest the Central Bank can push interest rates using conventional policy (QE would be unconventional), under ZIRP the F_E_D is doing all it can possibly do to drive growth using conventional monetary policy.

So lets look at some charts and see if yields are maybe telling us something as well...

*In green are the 10 year yields, in red the S&P-500. A reading to the right of 30.00 would represent a 10-year yield of 3.0%, a price of 28.22 would be a yield of 2.822%.

We often use yields as part of our Leading Indicators as they tend to pull price toward them, you've seen the indicator many times in Leading Indicators Updates. The normal correlation between yields and the market is almost identical, it's when there are divergences that we have useful information about the direction of the market, but we generally use these on a short term basis, we'll be looking at longer term trends.

 As of 1998, notice how yields trace the SPX (red) and through most of the chart's history until we get to the 2007 market top and after that there's a large disconnect as the F_E_D engaged in non-conventiaonal policy, namely QE which was buying of MBS and treasuries, which skews the normal relationship, but as we taper out of QE the normal relationship seems to be returning.

Falling rates=rising bond prices, which is the "Flight to Safety" trade as investors take money out of stocks and put it in the safety of government Treasuries.

Rising rates=Falling bond prices, this is a risk off trade and the money typically moves from treasuries as they are sold, to stocks, the "Risk on" trade.

 This is the 2007 top period, note how rates of the 10-year treasury are climbing with the SPX (bond prices are falling as the "Risk on" trade is in effect, however at the very top of the 2007 bull market yields do not follow the SPX to a new high and instead decline, this is because investors are taking money and putting it to work in Treasuries in the flight to safety trade, not long after that divergence the market had not only topped, but dropped until the 2009 lows, erasing 5 years of bull market gains and then some in 18 months.

 Looking at the 2009 lows as QE was first started by buying MBS in late 2008, then treasuries were added in early 2009, yields diverged positively as money was leaving bonds and flowing back to stocks in the risk on trade, after that they generally move together.

In both cases, 10-year yields gave early warning of both an absolute top and an absolute bottom.

 Late July of 2011 we saw the start of a decline in the SPX in to early August as the market had been ranging for several months before (like recent market action since February through most of May),  again the 10-year yield diverged as there was a flight to the safety of bonds and out of stocks by large players in the market. This decline was nearly -20% in a very short period.

Remember, yields/rates move opposite treasury prices.

 Before 2007 the two move pretty much in unison, at 2007 we have a divergence between yields and the SPX leading to the market top (red hash mark) and another at the lows of 2009 (white hash mark). After 2009 with ZIRP and unconventional F_E_D policy (QE), yields and treasuries saw al kinds of non-conventional pressures so they weren't very helpful during that period, but remember we are now down to a $35 billion taper and keep unwinding. 

 One interesting event was at the 2013 April F_O_M_C when the F_E_D was very hawkish saying they expected QE to be completely unwound by the end of 2013, some members wanted to start right away, this spooked the bond market expecting interest rate hikes as the F_E_D's guidance up to that point had been the first interest rate hikes would take place 6 months after the end of QE, this sent yields soaring to over 3% which spooked the F_E_D, you may recall some of my articles as the next several F_O_M_C meetings said virtually nothing about tapering QE and talked reassuringly about interest rates being held low for an extended period long after QE ended. The bond vigilantes essentially scared the death out of the F_E_D, Bernanke made a inter-meeting address to halt the rise in rates (orange hash mark as rates peaked over 3% quickly), nothing kills a market like anticipated or real interest rate hikes from the F_E_D, the bond traders were essentially discounting that outcome and that's the reason rates rose so quickly, NOT WHAT THE F_E_D WANTED!

 AGAIN WE LOOK AT THE VERY TOP OF THE 2007 BULL MARKET and you see the divergence in rates heading lower meaning treasuries were bid in a flight to safety.

Note how similar our current market, SPX vs. rates looks now below...

Looking at the current market from just before 2014, note the same pattern among rates, experts had thought the QE taper would cause rates to rise and didn't understand the falling rates. In addition, low inflation generally means low rates, however as we recently saw in the CPI (and other data), there are real inflationary pressures. Remember the F_E_D's target for inflation is 2%, but they'd like to keep it as low as possible for as long as possible so they aren't forced to hike rates.

In May, economists didn't understand why treasuries were trading with the SPX rather than yields after better than expected business inflation, upbeat jobless claims (which is already below the F_E_D's stated goal and inflation is above, they have met and surpassed both mandates, only the economy is not doing so great. All of the perceived good economic news "should" have led to higher rates, it didn't. Some think that the market is not buying the "healthier economic recovery", however if you look at the charts above, rates now vs 2007 and rates' ability to call tops and bottoms with uncanny accuracy, considering the inflationary trend...

Look at the CPI trend since the 1.1 reading, inflation has nearly doubled, this is what Yellen called, "noise" in yesterday's press conference, but with a trend like the last 4 bars, with food inflation up .5% in May and .4% in each of the 3 prior consecutive months and energy up .9% in May as well as housing, new cars, airline tickets, medical care, prescription drugs and a lot more (in an environment of real falling hourly wages", I think it's reasonable to wonder if Gold is telling us something about the market's take on inflation and rates are telling us something about the F_E_D's inability to hold down rates as an inflationary trend would force their hand to hike. 

Remember, the market always front-runs the F_E_D.

NUGT Trailing Stop

As you know I've been worried about a pullback in NUGT for most of the week, I have said in the past that we see divergences, but we don't know why. For example, the infamous RIMM earning's trade, we had strong positive divergences and suspected an earnings leak with a favorable outcome, instead they missed and dropped significantly a lot like MCP, however the 3C chart did not deteriorate one bit as they usually would, they grew even stronger, again much like MCP. It was a month or so later that there was a huge management shakeup and the long term CEO departed, while we could see the market was reacting to some inside information, we didn't know what it was and that RIMM trade that was down in the teens that we held, popped up to put us at a profit in the teens without adding to it at lower prices, so it surpassed even the area where we entered before earnings.

The same thing is happening with gold because of hot inflation, but had we waited for the reason rather than the signal in NUGT/GDX, we'd be chasing a move that's already happened. The point being, most of the time we are not going to know what smart money knows, thus we follow in their footsteps and NUGT has made a very impressive gain with gold over the inflation issue.

I'm trying not to exit NUGT as I think this hasn't even started, it hasn't even moved out of the stage 1 base yet so the potential for upside gains are quite spectacular, I don't want to miss those for a pullback, but we do have a big gap today with heavy volume, you know what that often means short term so even though the 3C charts that looked like a definite pullback have shot up and confirmed in most GDX/NUGT timeframes, there are still a couple saying, "pullback", so I'm going to institute a trailing stop on a closing basis and make that part of the decision if and when to take gains and wait for a better entry in GDX/NUGT, remember I said "IF and WHEN".

The 60 minute Trend Channel used on a end of day basis, has held this entire trend, right now the stop is at $41 on a closing basis, it should be higher tomorrow as the Trend Channel keeps locking in gains.

I'll update any new stops as events warrant or just email me.

Trade Idea: AAPL SPECULATIVE Call

AAPL was one of several assets including transports, NFLX, etc. that we expected to bounce this week which would make interesting areas to short in to the price strength, AAPL has not moved out of a tight range, but it looks like it will finally bounce, this is not a play I'm very interested in just because of the higher probability charts for AAPL, if I were to play it, it would be VERY speculative with some calls.

I'm much more interested in shorting short term price strength, which was the idea last week/Friday for this week.

 This is what I saw last week that made me think AAPL will bounce this week (3 min chart), instead we've seen a range, but we often see accumulation/distribution in ranges.

This week the 5 min chart shows a relative positive in the range, making an AAPL bounce look higher probability.

 And that divergence goes out to 15 minutes as you see above from this week.

 This is the same 15 min chart to provide some context and...

This 60 min chart is why I'm more interested in the short price strength, but near term the probabilities of that AAPL bounce finally taking shape are increasing.

I'll let you know if I decide to take on a speculative position, but it would likely be 1/4 normal size.

Gold is Telling Us Something

Lets face it, the knee jerk reaction seems to be in full force, that's what yesterday's move looked like yesterday as institutional assets sold off and why? As I said last night, while the policy statement sounded very benign, the market is very sensitive to when interest rates will be hiked, I don't know if it was the 2015/2016 rates edging higher on the infamous "DOTS" or Yellen's statement which is obvious, that rates may be held down longer or shorter as they changed guidance from quantitative (actual dates) to quantitative , which is, "we'll see how it goes" and how it goes is open to a lot of manipulation and interpretation...

For instance, Yellen's insistance yesterday in the press conference that inflation, specifically Tuesday's CPI is "noise", one month doesn't make a trend, but when CPI is above the F_E_D's 2% threshold and it has been trending up for 12 months, more than doubling over the last 8 months , THIS IS NOT NOISE, IT'S A TREND.

As I have said a few times recently, "Gold is bought on the EXPECTATION of inflation", we have a very real inflation monster right now and the F_E_D is seemingly ignoring it or calling it noise, this means to the pros, no matter what the F_E_D says, no matter what their best intensions are, if inflation keeps on at this pace, rate hikes are inevitable, the F_E_D will have no choice in the matter and that's what Gold seems to be reflecting today.

 THE RANGE AND EXPECTED HEAD FAKE MOVE IN GLD AS WELL AS GDX/NUGT.

Look at GLD today, it has broken above the range on huge volume, up almost 3.5%, and now the head fake move just before a reversal concept takes shape as a great example just above.

It's clear as this has been a 12 month (8 month accelerating) trend, that these ranges and head fakes were planned in advance as the inflationary monster didn't just rear its head this week, there's been a solid 8 month trend in which it has more than doubled as the ASSET / QE program has been unwound and in to real falling wages.

This is how far GLD has to go until it breaks out of a longer term base, not that far, then we have a new trend classification.

And GDX/NUGT, they are doing incredible, scary well and they are even closer to a breakout, remember that before QE, miners would lead gold as we saw a few times over the last week as the relationship seems to be coming back as QE is tapered out.

THE MARKET IS SCREAMING, IT HAS SERIOUS RATE HIKE QUESTIONS AS INFLATION IS NOT ONLY SHARP, BUT BEING IGNORED BY THE FED. Will they be caught off guard again like 2007/2008?

Quick Market Update

I have some other things to look at, but the market is struggling and it seems all favors are being called in, which may have a lot to do with a Max Pain Quad Witching tomorrow.


The problem seems to be the MSI gave out today, plus there have been negative signals all day...

The Russell 3000 Most Shorted Index with a squeeze yesterday tick for tick with the SPX, that's why there was no accumulation before hand.

Today it's not working so good, actually underperforming the SPX.

First it looks like they've turned to the SPY Arbitrage as it is in full force...

 SPY Arb is way ahead of the SPY for the day, yet the SPY hasn't responded yet.

One monkey wrench may be TLT, this was obviously a big part of that dislocation between the bullish SPY Arb model and underperformance of the SPY...

TLT which has to fall for the SPY Arb. lever to work (with VIX falling and HYG going up or some version of that as far as relative performance) looks as it may have just found a intraday bottom with that volume, a mini-selling climax, I'm going to take a closer look as it would be quite interesting if the SPY Arb has been this strong all day and failed to move the SPY, what happens if it gives out.

Again, another indication yesterday was a knee jerk as they have to turn to SPY Arb in a huge way just to hold the SPY at a slight loss/neutral. That's a long way off from next day confirmation.

NFLX Update

NFLX ( a large H&S top, verified by volume) is one of the short ideas for this week that I expected to bounce , giving us a better entry, I'm already at full position size with about -5.5% drawdown (on position), which is more than manageable, but I wouldn't be opposed to opening a put if conditions were right and of course calling it out for anyone who may be interested, but didn't get a chance yet.

NFLX is at the top of the right shoulder, the 2nd out of 3 places I'll short a H&S, so it's at a good entry level as well as risk level. I'm not calling it out right now (today), the 1-3 min charts don't look quite as I'd like to see them (that may be because of quad-witching tomorrow), but at this level and considering the bigger picture, I wouldn't be opposed to a partial position (short) here and even if it fills the gap and starts a bit lower, it's still more than close enough to the top of the right shoulder that it lowers risk and provides and excellent entry.

The charts...

 This is the small accumulation of last week that was seen in several assets I'm interested in and why I expected them to bounce this week, lowering risk and giving a better entry for a short.

The 5 min chart is showing deterioration, overall price action is fairly bearish.

Nothing has changed on the charts that matter, the ones that make me want to have NFLX as a short, in fact it's one of my favorite short ideas out there among stocks (non-ETFs). 15 min

 60 min in to the H&S head and right shoulder

4 hour with the preceding uptrend confirmation and distribution in to the full H&S top.

This looks to be at a reasonable level considering we expected a bounce this week to short in to, as I said though, I'm not worried about NFLX at all, I'd just like to see the 1-3 min charts looking a bit worse, more in line with the market averages.

Trade Idea: Transports/ FDX

I have my stock and ironically, it's one that showed up in my DeMark-inspired Buy/Sell indicator scan as a sell, FDX.

Here's what I like about it...

 First as a double top (this isn't as large as a true double top if we're going by the textbook) or more appropriately, a clear zone of resistance, I'd expect the probabilities to be very high for a head fake move above, especially in light of last week's call for transports to bounce and that bounce could be used to set up a short.

Second we have a bearish reversal pattern on the daily chart in place thus far, a Harami (mother with baby in Japanese vernacular). There's also no follow through move today at all.

 As far as my buy/sell DeMark inspired indicator, the long term scan (I ran daily and multi-day) shows pretty good signal calls with both buys and sells.

The shorter 1 day gave a signal May 30th, at the last or second part of the double top.

 As for the long term 2 hour chart, we have an accumulation zone back in 2013, over a year ago and the trend after is proportional with the accumulation zone or stage 1, 3C starts going negative at the first of the double tops and leads negative in to the second.

 The 60 min chart shows something similar, with just stronger distribution at the second top, which is what the 2 hour chart above is showing with the deeper leading negative divergence.

On a 15 min chart, yesterday's move looks to be pure knee jerk as there's no accumulation before the move at all. To the left there's a negative divegrence in to the second top.

  On a 3 min chart, there's no confirmation at all of yesterday's move, the same as the chart above, there's also no accumulation for yesterday's move which again smells of knee-jerk reaction to the F_O_M_C.

The only small accumulation as it is on a 2 min chart is the very same that I saw last week in transports making me think we'd get a bounce higher we can short in to, if it was a 15 min chart with accumulation I wouldn't think about shorting in to it, but a 2 min chart, it's like I often say, if you only have a gallon of gas, you're only going to go so far, that's the same for base size and accumulation size/timeframes.

Also we have a clear negative in to the move up.

I'm going to open a half size position in July (standard) 19th $145 puts, I'll open the second half if this scenario plays out, if not, I'll manage that trade and look for the next set up (the reason I chose options rather than equity at this point is the strong move up which is what I prefer to set options trades up with, extreme moves).

This is a Harami (bearish) downside reversal set up (last 2-days), often the confirmation candle is seen the next day or the day after and almost every good (bearish) confirmation candle will start with a gap up and a close below the Harami's second candle (today's), this would include Dark Cloud Cover and Bearish Engulfing Candles. I'll set a price alert a little above this area looking for a gap in the a.m., if we get that and the 3C charts still look strong, I'll bring the put position up to full-size.

Trade Idea: Transports

IYT is one of the candidates from last week I was looking for a bounce in to short in to, it looks to be in just about the right spot, but I'd rather have some leverage on the position and the July options in the range I'm looking have very little volume and some huge spreads, therefore I'm going to go to the Industry Group components and look for something that looks more feasible.

As for the charts...

 On the trendline break, this heavy volume is usually taken by technical traders as a sign continuation or downside confirmation will continue the next day, however I've found from volume analysis that large volume often marks a temporary reversal point, especially if accompanied by a reversal candlestick, but on this day, I suspected it was a short term reversal, Trade Set-Up (Longer Term) IYT / Transports

We now have a nice diminishing volume bounce, I wouldn't mind if today closed on increasing volume and a Doji/Hanging man like candlestick similar to what we have now on a daily chart.

 The link above describes the trade set up and letting the trade come to us, but as you can see, there's a reason I was interested in Transports as they started to look bad a while before the set up post (those are linked in the set up post).

This is the larger volume down day and some weak positives which gave me more reason to expect a weak move to the upside we could use to short in to as we did actually call the top on 6/9, but I didn't enter any positions then.

The intraday 1 min chart tells us something about the market as a whole especially if you subscribe to Dow Theory (Transports vs Industrials, although I think the R2K is a more appropriate comparison these days than the Dow-30), it also is the kind of divergence I want to see to set up a position.

 This is the same divergence backed out to trend view so you can see it never really did confirm which is even better.

And the 5 min chart with 3C turning right before the 6/9 top as a price ROC had just taken place.

Since I'm not thrilled with the leveraged options in IYT, I'm going to look at the stocks in the industry group and see if there's a better looking set up, behind the market, the Industry group has the most directional influence on stocks within that industry so the group (above) not looking good, in fact looking like a short trade entry, should have a lot of candidates, it's just a matter of finding the right one.

MCP Follow Up

So far we have excellent confirmation with MCP. Between the daily Bollinger Band Squeeze and the Crossover Screen just going long , I think this is just the start of a bigger move in MCP. I had wondered if there may be a head fake move below $2.43 and had set alerts for it as I would have entered calls just like the last stop run below $2.50, but it seems that last head fake/stop run that we traded long (below $2.50) may have been the head fake move that we normally expect to see before a reversal (upside in this case).

Here's what good confirmation looks like...

 The 2 min chart confirming, even showing the positive divegrence that got this move started, this is why I have put up MCP 7 times previous to today over the last week.

 The 5 min with the last trade on the move below $2.50 and a beautiful positive divergence, these are in every timeframe

The 10 min with another beauty.

And the 30 min (I believe I showed the 15 and 60 min in the last post).

So far confirmation is good, I suspect MCP is going to make a multi-day run from here, there are likely to be consolidation areas, not every single day up, but I do believe it's starting the move to the upside as the longer term base's reversal process/head fake is mature and proportional to the year+ base.

We'll put this one in the Trend Channel ASAP.

Market Update

So far no follow through on yesterday's move, another indication suggesting a typical F_O_M_C knee-jerk reaction, what's important about that is that the knee jerk reactions most frequently are the wrong reaction and are reversed and then some.

So far there's more intraday deterioration....

 DIA not only did not confirm on the very fastest chart which should be able to confirm in near real time, maybe a 5-10 min delay, but there has to be some underlying action. Now we see an even deeper divergence developing.

 The IWM was the long call from Friday so the inline status (green) is normal for a 1 min chart, it's yesterday's non-confirmation and today's  deeper leading negative.

The Q's are showing the same

And the SPY is starting to lead intraday as well, that's confirmation between all 4 major averages.

I'm still considering adding to the IWM put position , I'm a little hesitant with quad witching tomorrow, but if the signals and set up are there, I believe this move will be faded.

I'm also still a bit concerned about NUGT, that's quite a gain and gap, however, as noted, gold is usually bought on the EXPECTATION of inflation, CPI showed us that we have at least an 8 month trend in which inflation has more than doubled.

MCP Update

Lets just jump to the charts...

 This is the last MCP trade we opened with calls and filled out the partial long position as a head fake move took out stops at $2.50 on heavy accumulation (at the white arrow). The next day it was up +12%, we closed the calls that day, but left the MCP long equity position in place as 3C never deteriorated, even since the drop post earnings (reminiscent of the RIMM trade which showed excellent signals and poor price action until a month or so later when they had a major CEO/management shake-up and it leapt to a double digit gain).

 I posted this chart last Friday, Interesting MCP Chart as the BB's squeeze on a daily indicating a highly directional move is about to start, with the 3C accumulation, the probabilities are strongly in favor of up.

This is the 60 min chart which along with longer charts has stayed positive even after the post earnings decline.

Here's the 15 min chart and our last trade signal as we bought calls on the break of $2.50 as stops were hit, this chart has stayed very strong for near term action.

As for our Daily X-Over screen, one of 3 indicators is giving a long, the other two (middle and lower) are likely to cross up today to a long signal.

As far as MCP's longer term view, this is one I have liked for a long time, the range / base was so well defined, we expected a head fake move below the range before a move up, even though the move seems large, it's very proportional to the base, also notice how low MCP still is within the base.

After a base this long, the head fake move is actually very proportional. Based on the price pattern implied target, MCP should hit at least 12, but I believe this is going to enter a longer term primary bull market. I wouldn't chase this if possible or at least consider phasing in to it, but there's plenty of upside in my view.