foxex: Fight the Fed?

Chart Advisor | Focus on the Price

Friday, February 28, 2020

1. Yields drop dramatically as bond prices soar

2. Stocks find support but will it hold?

3. Keep it cute and don't leave home

Market Moves

Treasury bond yields dropped dramatically today following yesterday's historic low mark. It's hard to overstate how significant this move actually is and just what it implies. As bond prices hit new all-time highs, again, and stocks find a measure of support, experienced chart watchers know there is a meaning behind the mad movement.

The chart below compares the 10-year Treasury Note index (TNX) with iShares' 20+ Year Treasury Bond ETF (TLT). The inversely correlated move (up for prices, down for yields) was so strong over the past few trading sessions, that only two such moves in the last decade compare. If you measure only down moves and compare them over the years, the only two times that bonds jumped so high so fast, were on the occasion of the 2010 flash crash, and the 2011 debt-ceiling crisis which led to the downgrading of the US Treasury bond rating from triple A.

Further, if you measure these moves as a percentage from the starting point, you see an amazing fact jump out at you. This kind of a move has NEVER happened before in the history of the 10-year Treasury note index (see second chart below). This comes in the shadow of the Fed making it quite clear in their November and December FOMC meetings, that they did not expect to change rates throughout 2020. This kind of a move is tantamount to the market calling the Fed's bluff.

Stocks Find Support but Will it Hold?

The chart below (you'll really want to click on it to see a fully enlarged view) shows a vanilla Elliott Wave Theory (EWT) analysis of the moves on State Street's S&P 500 Index ETF (SPY) over the past 14 months. Personally I'm not a big fan of expecting EWT to forecast exactly how the markets will move next. There is a bit too much subjectivity in the nature of its methods for that (see rule # 7 here). However, it makes an excellent risk and reward analysis tool. Especially at times when the market makes you scratch your head and stare in disbelief at a chart.

This chart shows the typical 5-part impulse wave pattern typical in bull markets, according to EWT (green line). The theory posits that what comes after this pattern is a 3-part corrective wave (red line), one that moves counter to the previous trend. There is no way to predict precisely how that corrective wave will play out, but if you apply a Fibonacci retracement tool to the recent move, and if you assume the today's price action was a short-term bottom, then you can make the simple forecast for how the price move may play out. The market bottoming here is a big assumption, but the Volatility index (VIX) did hit 50 today, a historically significant turning point.

This is rather stunning prediction actually, because it means we could see a seven to ten percent rise in stocks in very short order, followed by an even bigger fall before the market correction has run its course. For investors who like a set-and-forget strategy, this is something they won't want to watch. For traders who thrive on volatility, this amounts to can't-miss TV!

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Keep it Cute and Don't Leave Home

If the news about stocks falling and Coronavirus fears makes you want to shield yourself from the world and find something Kawaii to look at, then you might be interested in the next chart. It seems that two stocks on the rise today are a home-craft-support company and a flower-delivery service. A quick glance at their charts shows that the price pattern for Etsy Inc. (ETSY) and 1-800 Flowers (FLWS) haven't really been affected by the Coronavirus scare. These investors prefer to work from home and order flowers by smart phone. Figures.

The Bottom Line

Bond yields tanked as prices rose to all-time highs again today, giving the stunning impression that the market thinks the Fed has got rates wrong. Stocks seemed to find support as the VIX hit 50, so the markets may have a wild roller-coaster ride up ahead.