Earlier in the week we noted US stock market negatives in that EPS estimates are coming down and even more importantly, the over valuation of stocks (SPX dividend yield of 1.9% vs. 10yr Note’s 3.2%); but also that the 2yr yield and 3 mo. T-bill report “still bullish”. Well, after yesterday’s relief rally got everyone’s attention, here is another one that bulls and bears should be watching, the yield curve.
Because if certain bearish indicators break down down to join the still-bullish 2yr/T-bill, it’s going to be the old familiar tale of temporarily triumphant bears claiming victory (my target is SPX 2100-2200 in 2019, post-relief rally) then having their ball taken away by the bulls. If it gets bad (or good, depending on your vantage point) enough you know what comes next; a lot of being chased around the playground and wedgies* galore for the bears.
So today’s indicator du Jour is the Yield Curve, which got hammered yesterday and needs to retain its post August uptrend or the bulls may frolic and revel this holiday season. What’s more, gold bugs could take the traditional year-end drubbing. But we can do that standing on our heads if we are prepared with short and longer-term views.
Meanwhile, people should manage the market they’re being presented with, and that requires the use of indicators aplenty. The yield curve is still trending up but would really hurt the bear case short-term if it breaks down again.
The above is the 10yr-2yr, which is the most commonly watched yield curve (at yesterday’s close). For reference, here is the 30-5 in real time. It’s still in a short-term uptrend and FOMC is today. The bears want to see it hold or else there could be some painful underwear related issues upcoming.
For global citizens who may not understand American lingo, a wedgie is…
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