Monday, July 28, 2014

Topping Out

We are on the 3rd consecutive down day after topping out on Thursday.  The chop till you drop view is still in effect.  We are in the chop phase, and it can last about 2 weeks on average, but sometimes that can extend out for an extra couple of weeks.  Since July 3, when we got that blowout jobs number, we have been chopping sideways to slightly down.  That is almost 4 weeks.  A drop is very ripe to happen at any moment.  Not a 1 or 2 percent BTFD drop, but a 4 to 5 percent correction which shakes the confidence of the bulls.

Treasury bonds have been very strong since this chop period, since the blowout jobs number, going from 2.7% to 2.48% on the 10 year bond.  The 30 year bond is doing even better, as the yield curve flattens out.  Sometimes there doesn't need to be a catalyst to break down 4 or 5 percent, they can happen in a vacuum because most of the buyers are satiated and are unwilling to add more at current levels.  It is nice to have an imminent catalyst to propel the down move, but it isn't necessary.  Right now, I see no catalyst, which makes it difficult to time the drop, but from a price action and technical perspective, we are very vulnerable to a small correction.

I would like to buy a dip in Treasuries this week ahead of the nonfarm payrolls report, because expectations are high for the numbers after the rise in jobs numbers in recent months, and there is a lot of room for disappointment.

5 comments:

Anonymous said...

How do you see shorting Russell? It looks very weak. Thx

Market Owl said...

I don't have an opinion on the divergence between Russell and S&P. I would rather short the S&P than Russell but they should both go down roughly the same way, with just beta differences.

Anonymous said...

HI, I am newbie on yield curve. What do you mean yield curve flattens out? I saw 2year and 30 years doesn't looks like flat yield curve...thanks in advance.

Tony

Market Owl said...

Yield curve flattening is when short term interest rates rise relative to long term interest rates. This year, 2 year yields are up but 30 year yields are down a lot, so yield curve has been flattening all year.

Anonymous said...

Thank you! Tony