I was chatting with @Jeremiah S this week about bond yield, yield spreads, and the market.
He gave me a heads-up on US02Y bond spiking up recently.
"The 2Y is incredibly important because if the short end of the curve spikes then that will put a lot more downward pressure on equities than the 30 year rate going up."
I recently read the book by Marin Katusa "The Rise of America" and he did a great job at explaning Fed's swap lines and other macro ideas so that even a macro simpleton like me could gain a better understanding of them.
Also the idea on "crossflation" other than resorting to one school of thought of "inflation vs deflation" was also refreshing and I definitely recommend the book.
Macro and bonds are not my area so I welcome any comment that could shed some light on this topic.
Signal in Bond Spread and Market Correlation
(I compared 30 year US bond yield against the short-term yields 2year based on the suggestion by @Jeremiah S to see if anything strikes a chord)
CHARTS OF (US30Y-US02Y) On daily and weekly
I was wondering if there could be some correlation of what the bond market has done lately and is likely to do next from technical analysis point-of-view.
I then looked at charts of $DXY (US dollar index), Stock Index Futures (ES:S&P 500 Futures ,NQ: Nasdaq Futures ,YM:Dow 30 Futures) and $DJCI (Dow Jones Commodity Index).
On June 16 (Fed Conference Day) US02Y (2 year yield) began spiking up (all the bond yields spiked up but 2yr yield reacted the most to the upside) and which also coincided with Dow Jones 30 shooting below its 50 SMA (D).
As you probably already know Dow Jones 30 has many companies (industrial,retails) that can pass along the cost of inflation to their customers and benefit more from an inflationary environment than deflationary which is more beneficial for techs and growth companies.
Also financial companies benefit from wider spread between longer term bond vs shorter term bond. Because their business is about borrowing on short-term and lending on long-term.
Btw, Dow 30 other related indexes and ETFs like $DJT (Dow Jones Transport Index), XLF (Financial Sector ETF), XLI (Industrial Sector ETF), XLB (Basic Material Sector ETF) were already beginning to sell off days ahead of the Fed conference on June 16.
Dow 30 does have some tech companies like AAPL, MSFT,CRM but the weightings in Dow 30 are not determined by market cap but price of the stock which is kind of skewed with the reality.
Dow Jones 30 holdings (https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average)
@Jeremiah S also did a good job at pointing out that, "Yield curves are more of a reversion to the mean trade than a long term trend trade because by definition they chop around in a range."
Is it so because market likes stability in the bond market? So, it would interpret spikes negatively?
That's how I would interpret it but please let me know if there is more to that.
Combining the mean reversion signal in bond spreads suggest that /YM (Dow 30) has a better chance of moving up than /NQ (Nasdaq) who doesn't benefit from inflationary force than DOW.
Plus /NQ has reached an fib extension level of 127.2% where a lot of moves terminate and go back to the means. We've seen /ES responding to the weakness in /YM recently but when /YM came back /ES came back strong with it. /ES has the most amount of potential for the upside from technical point of view with its squeeze on daily chart.
I was actually bearish on the market and bought puts on SPY on June 17 into closing which was a good entry but I didn't sell it until June 21 (Usually shorting back to 21EMA (D) after two closes below 21EMA (D) is a good entry for short continuation and that's why I held onto it.)
I took a small loss on that trade once /ES started looking to close above 21EMA (D).
Hope you enjoyed it. Took the whole Saturday evening to write this.
1. Moving Averages
8 EMA: Yellow
10 SMA: Orange
21 EMA: Cyan
50 SMA: Pink
200 SMA: Purple
2. DMI: Measures trend strength
3. TTM SQUEEZE: Measure volatility contraction and expansion
4. MultiTrend JT3: Measure changes in relationship of certain moving averages to gauge current and past trends.
5. Keltner Channels: Measure average true range
Blue (dotted): 1ATR (21 day)
Red (dotted): 2ATR (21 day)
Green (dotted): 3ATR (21 day)
6.Ichimoku Cloud: Projects potential area of support and resistance
7.Fibonnaci Retracement, Fibonacci Projection
8.10X Bars (By Simpler Trading)
9.Trend Oscillator (By Simpler Trading)
Learn More About DMI (Directional Movement Index)
10X Bars (By Simpler Trading)