YIELDS PLUNGE AND TREASURIES SOAR ON THE FED TWIST -- SMALL-CAPS SHOW RELATIVE WEAKNESS -- STOCKS SELL OFF SHARPLY AFTER FED -- IWM BREAKS NECKLINE SUPPORT ON INTRADAY CHART -- FINANCE, MATERIALS AND ENERGY SPDRS BREAK TRIANGLES
YIELDS PLUNGE AND TREASURIES SOAR ON THE FED TWIST ... Link for todays video. The Fed made Operation Twist official today. As the name implies, the goal of this program is to twist the yield curve by buying 6-30 Year Treasuries and selling Treasuries with maturities of three years or less. This will push rates at the long end of the curve down and rates at the short end up. Remember, Treasury yields fall when bonds rise (Fed buying) and yields rise when bonds fall (Fed selling). In its policy statement, the Fed noted strains on the economy and rising risk in the financial markets. As John Murphy noted yesterday, there is really not much the Fed can do. Moreover, pushing long-term rates down and short-term rates up will make the yield curve flatter, which is not in the best interest of banks. Regardless, long-term Treasuries are soared today and long-term yields are plunged. Chart 1 shows the 30-year Treasury Yield ($TYX) moving below 3.10% for the first time since early 2009. Notice that long-term yields are falling almost as fast as they fell at the end of 2008. $TYX ultimately bottomed in December 2008 around 2.6%. As noted by John in the September 10th market message, rising Treasury prices (falling yields) are bearish for stocks. The S&P 500 bottomed in March 2009, which was four months after the 30-year Treasury Yield turned up. Therefore, we should not expect a significant bottom in the stock market until Treasuries yields bottom and turn up.
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Chart 1
Chart 2 shows the 10-year Treasury Yield ($TNX) moving below its 2008 low over the last few weeks. This is quite a statement. 10-year Treasuries yield less than 2% for the first time since the early 1950s. The trend has been down for some 30 years now (since 1982). Chart 2 shows a 20 year downtrend. Despite low yields, investors/traders are still willing to buy low yielding Treasuries. This indicates an above average level of uncertainty in the financial markets and economy right now. Put another way, this favors the risk-off trade. This is the trade that favors safety over risk. US Treasuries and the Dollar are the main beneficiaries. Stocks, oil and the Euro are out of favor in the risk-off environment.
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Chart 2
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Chart 3
SMALL-CAPS SHOW RELATIVE WEAKNESS ... The PerfChart below shows the major indices since August 30th. All are down, but the Nasdaq is clearly holding up the best (-1.47%). Led by Apple, Amazon and some other large-cap tech stocks, the Nasdaq has outpaced the rest of the market this month. On the downside, the Russell 2000 ($RUT) is leading the way lower with a 8+ percent decline the last 16 days. The broad-based NY Composite ($NYA) is second with a 6+ percent decline. Relative weakness in small-caps is not a good sign. Smaller companies are the most sensitive to changes in the economy. Relative weakness in this key group confirms downside risks in the domestic economy.
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Chart 4
STOCKS SELL OFF SHARPLY AFTER FED STATEMENT... Small-caps led the market lower as stocks declined sharply across the board on Wednesday. Chart 5 shows the Russell 2000 ETF (IWM) plunging below 67 with a 3+ percent decline. I showed this chart on Monday and labeled the advance since early August as a rising flag. While this pattern looks more like a channel on the daily chart, it looks like a robust flag on the weekly chart, which was also shown on Monday. The ETF is now testing the early September lows and a break below these lows would signal a continuation of the July-August decline. Also note that this is the seventh 5+ percent move since early August. Talk about a wild range. Chart 6 shows the S&P 500 ETF (SPY) plunging around 3% with a move to the flag trendline. CCI broke into negative territory and moved below the early August trendline.
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Chart 5
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Chart 6
IWM BREAKS NECKLINE SUPPORT ON INTRADAY CHART... Chart 7 shows a 30 minute line chart for IWM. This chart focuses on the consolidation since early August. There are two possible patterns at work here. First, the consolidation from August 22nd looks like a Symmetrical Triangle. Second, the pattern since early August looks like a Head-and-Shoulders. These patterns can mark reversals or continuations. A Head-and-Shoulders after a sharp decline is really just one big consolidation. The lower trendline of the Symmetrical Triangle also marks neckline support, which was broken today. This signals a continuation lower and targets a move to around 60. The height of the pattern (73.5 66.5 = 7) is subtracted from the neckline for a target (66.5 7 = 59.5). The indicator window shows the Price Relative (IWM:SPY ratio). With a break below the August lows this week, IWM is clearly showing relative weakness.
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Chart 7
FINANCE, MATERIALS AND ENERGY SPDRS BREAK TRIANGLE SUPPORTS... The finance sector was under enormous pressure Wednesday as Moodys downgraded a number of big banks. Since April, Citigroup is down around 40%, Bank of America is down 40% and Well Fargo is down 25%. Hmm....sounds like Moodys is a little late to the party. Relative weakness in the Finance SPDR (XLF) is nothing new though. Chart 8 shows XLF plunging around 5% with a close below 12. With this decline, XLF broke the lower trendline of a triangle consolidation. This signals a continuation of the bigger downtrend. The Price Relative (XLF:SPY) sank to another new low.
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Chart 8
With industrial metals prices moving lower, it is little surprise that the Basic Materials SPDR (XLB) broke triangle support with a sharp decline today. Chart 9 shows the ETF testing its August lows, which mark potential support. I say potential because the bigger trend is down and support levels are expected to be broken in a downtrend. Last weeks high marks first resistance. Chart 10 shows the Energy SPDR (XLE) is a similar pattern and breakdown.
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Chart 9
