SPIKE IN 2-YEAR TREASURY YIELD SUPPORTS DOLLAR BUT CAUSES PROFIT-TAKING IN STOCKS AND COMMODITIES -- S&P 500 MANAGES TO HOLD ABOVE INITIAL CHART SUPPORT AT 925 AND ITS 200-DAY MOVING AVERAGE

2-YEAR TREASURY YIELD SPIKES ... On Friday, I showed the U.S. Dollar Index bouncing from chart support at its December low, and suggested that a dollar bounce could cause short-term profit-taking in stocks and commodities. We saw some of that on Monday morning as stocks and commodities started the week on a soft note. In addition to technical factors, the dollar bounce is being supported by a spike in the 2-year T-Note yield. Chart 2 compares the 10-Year T-Note yield (blue line) and the 2-Year T-Note yield (black line) since last September. The yield curve, which plots the difference between those two maturities, has recently risen to a record high. Chart 1 shows why. The 10-Year T-Note yield (blue line) has been rising since March on heavy government borrowing needs and growing fears of inflation. The 2-year yield (black line) remained flat and was anchored by the Fed's stated intention to keep short-term rates low. That all changed on Friday as the 2-Year Yield surged to the highest level in seven months (and continued higher again today). The sudden spike in the shorter-term rate has raised fears that the Fed may start raising short-term rates sooner than expected which would support the dollar but could hurt stocks and commodities.

Chart 1

S&P REMAINS ABOVE INITIAL SUPPORT LEVELS ... Although the S&P 500 closed marginally lower today, an afternoon rebound kept the market benchmark above its 200-day average and initial chart support along its May peaks between 930 and 925 as shown in Chart 2. Volume was light, however, and there were more big board losers than winners. More substantial support can be seen along the May lows near 880 (and the 50-day moving average). The "hourly" bars in Chart 3 show the last month's price action more clearly. Over the past week, the S&P 500 has established a small trading range between resistance at 950 and support near 925. It bounced off the latter level today, although the rebound wasn't that impressive. A close below 925 is needed to signal a deeper correction toward its May lows. I indicated on Friday that the latest move to a new 2009 high was on shaky ground (light volume and a number of short-term negative divergences). That's still the case although the the market isn't giving up ground easily.

Chart 2

Chart 3

SHORTER MATURITY TREASURY ETF TUMBLES ... Treasury investors had another bad day today. Chart 4 shows the Barclays 7-10 Treasury Bond iShares (IEF) falling to the lowest level in seven months as long-term rates continued to rise. The real shocker came in the Barclays 1-3 Year Treasury Bond iShares (SHY). Chart 5 shows that ETF tumbling for the second day in a row. In so doing, the SHY has broken its March low and its 200-day moving average. That was the direct result of the spike in the two-year Treasury yield. The question traders will be debating this week is why that's happening and what it means for the economy and various financial markets.

Chart 4

Chart 5