Stocks and Treasuries Continue to Disagree

| July 30, 2010

We have been monitoring a negative divergence between stocks and treasury yields over the past month, and both markets are now forming bearish technical patterns, suggesting that they will likely move lower sometime over the next two weeks. The S&P 500 index has rallied 7% since bottoming at the beginning of the month, but the uptrend has now taken the shape of a bearish rising wedge formation.

This type of advance usually ends with a sharp correction, and a break below uptrend support near 1,098 will likely result in a fast move down to critical long-term congestion support in the 1,060 area. While stocks have rallied, the yield on the 10-year treasury note has held near recent long-term lows, and it is now forming a bearish descending triangle.

Treasury yields are right on the brink of another long-term breakdown, reflecting growing risk aversion that is not currently being priced into the broad stock market. A move by 10-year note yields well below support at the bottom of the descending triangle in the 2.90% area would be a major bearish signal, forecasting additional gains for treasuries and precipitous losses for stocks.

This is a significant divergence that should continue to be watched closely. We will be monitoring the support levels of both bearish formations during the next several sessions for signs of a breakdown.

Category: Commentary, Market Update


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