Sven Henrich via Northman Trader

Continued carnage in yields with added yield curve inversions. Where does it end, how low can yields go on this run or are there signs of imminent reversal. Lots of questions to ponder. The riddler seems to be having fun with everyone on this one. And since no economist nor any Wall Street firm forecasted these levels for 2019 let’s have them sit this one out for the moment.

Obviously massive underlying issues from economics, politics, confidence, but also structural i.e. pension funds being forced in, we can discuss and speculate until the cows come home. Me? I always like to look at charts and see if they give us any insight and perhaps some perspective.

Let’s start with $TLT, some of you may have seen this chart, but here it is updated:

What do I like about the chart? It’s simple, it’s clean, what a spiffy trend. Hit the lower trend line and boom, reversal, hit the upper trend line and boom reversal. It’s been going on for years hence I was a bit surprised when everyone expressed certainty of higher yields to come when $TNX hit 3.2% last year. Doesn’t anyone look at charts?

This trend has been in place for years and years. Then $TLT built an inverse pattern and boom, broke out of that one.

Now this move here. Historic, just looking at the weekly RSI, this is where reversals have come from in the past. But then there is the upper trend line. A magnet? The riddler is teasing us. Tagging that trend line would have implications in terms of yields collapsing further of course.

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But then here’s a very different perspective, a ratio chart of $SPX and $TNX:

Well, that’s a bit of a stunner isn’t it? Also a super clean channel and guess what? Every time the ratio hits the upper trend line the 10 year bounces. And we’re right back up at the trend line. So this chart seems to be counter to the $TLT chart which suggests a magnet move to the upper trend line is possible. Perhaps it is, but perhaps a reversal in yields first, especially given the weekly RSI reading.

But what if the ratio breaks above the trend line? Then we are dealing with a very different market.

There’s another possibility of course as well. Since it is a ratio chart it includes another variable, the $SPX. The ratio raced higher this steeply this year because both bonds and stocks rose at the same time. So one could imagine the ratio reversing off of the trend line even if yields do not reverse higher. How would that happen? If stocks reversed lower.

Great, now that tells me nothing you say. Well, actually it does. It says that the ratio is at a very critical juncture and it demands a market reaction, either yields reversing or stocks dropping. Or if yields continue to drop, then stocks could drop much harder.  For bulls there’s another alternative: Stocks rising, but yields reversing harder.

What? You think the riddler would make this easy? No, but these charts are very clean and they say something is going to happen soon and from the looks of it it may be a sizable move which means stocks will break out of the recent range they’ve been in. The riddle remains which way, but if yields don’t reverse then the ratio chart suggests stocks would drop lower. Watch both closely.

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