WinFlag_Feb14

That was impressive.

The hot CPI and weak retail sales data hits the tape at 8:30 eastern, S&P500 futures trade down 48.25 points or 1.8 percent in a Jackie Moon moment,  bounces around for about 20 minutes, then takes off and trades up 2.8 percent from the low into the close.  Even as the 10-year yield breaks and closes through the Maginot Line of 2.9 percent.

S&P500_intraday_Feb14

The cash S&P500 has now rallied 6.55 percent off its Friday low and recovered 48.78 percent of the high-to-low loss in this market move.   A move through the 20-day moving average at around 2770 will force the bears and shorts to reconsider their market view.

Can’t believe we are sucked into commenting on short-term moves, which are noise and random at best, determined almost solely by how the fast money is positioned and leaning.  But in the long-run there is always another short-run.

Nevertheless, today’s price action signals:  1) the market is “sold out” in the short-term;  2) there are few real sellers left in this leg, and 3) the fast money and machines were offside going into the CPI betting on an Armageddon number, which they kind of  got but were not rewarded.  Bond shorts faired much better.

The bullish and FOMO psychology hasn’t washed out yet and thus still makes us suspect the lows are not in.   The market is still very expensive and you can throw out the widely touted “fairly valued” EPS, which are the result of financial engineering and stock buybacks.

We like the S&P500 Price to Sales ratio as a more objective valuation metric as even earnings can easily be manipulated and are creatures of corporate CFOs.   We know that from our experience of working in a large money center bank.

Moreover,  the dollar continues to weaken, when fundamentals favors strength, which is a major concern.  Especially as interest rates rise.

Something is rotten and driving the capital flight.

Today was impressive, however.  Chalk another one up for the bulls.

Next Levels

Today’s high on the cash S&P500 was 2702.1, just a little more than 50 bps below 2702.78, the 50 percent retracement and key Fibonacci level.  The next level is 2726.67, last Wednesday’s high before the swan dive to 2532.69 on Friday morning.

Where Are 10-Year Yields Headed?

Nobody knows and because of that uncertainty, we look to gurus or technical analysis to comfort us and ease the anxiety of not knowing the future.

We do know the long-term downtrend on yields has been broken and looking at the chart, a reverse head-and-shoulders bottom has formed.   The neckline has been broken and a measured move  will take the 10-year to around 4 percent.

TNOTE Yield_Feb14

Makes sense to us, fundamentally,  as real interest rates are set to rise due to the supply and demand dynamics in the U.S. bond market and inflation is increasing.    A two to three percent real rate plus inflation has always been a running assumption for the long-term equilibrium interest rate all throughout our research career.

Technical Analysis

Technical analysis is imperfect but a tool, and one way to light the uncertain and a foggy-lit path of future prices.    We are not religious zealots and only half way sold on the utility of technical analysis but just throwing it out there for you.

We infer from the price action and lots of losses of the past several years that the machines use technical analysis to set bear and bull traps.   It has rarely paid to place a bet when a key technical level breaks as the algos are programmed to generate a giant reversal and squeeze when they calculate and estimate the net position of traders is leaning the wrong way.

Whatever your view, however, three percent is the next big number for the 10-year note yield.

By the way, remind us not to comment on short-term market moves.