Economics

Long Bond Is At An Extreme Level

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Buy Everything?

Monday’s market was similar to the rally on Friday afternoon. It was a very strong across the board rally. 79% of stocks rose which didn’t meet the threshold set on December 26th, 2018. That’s the one in which 96% of stocks rose, but we wouldn’t call Monday’s rally disappointing. 

Dow rose 5.09% which was its biggest gain since March 2009. S&P 500 rose 4.6% which was its best day since December 26th, 2018. Nasdaq also had its best day since 2018 as it rose 4.49%. Apple rose 9.3%. That’s a massive move for a company worth $1.3 trillion. It traded like a penny stock.

Digesting The Rally

Russell 2000 badly underperformed as it was only up 2.85%. It’s very rare for such a large gain to be vastly below the big cap averages. That occurred likely because of the big rally in the long bond. VIX fell 6.69 points to 33.42. Last week many said it would crater soon. This is only the beginning of that decline. 

S&P 500 is now only down 4.35% year to date as the market ended its 7 day losing streak. That was one the craziest crashes we’ve ever seen because stocks had no support. It was like an elongated flash crash except the market was reacting to panic rather than technical difficulties. The 14 day RSI hit 19.05 on Friday. That’s the lowest level since August 25th when it hit 16.77.

As you can see from the chart below, Monday wasn’t a normal post-correction rally where the worst hit stocks in the correction did the best. In fact, the 10% worst performing stocks in the correction did the worst on Monday. This wasn’t a snapback rally for them. Royal Caribbean stocks only rallied 19 basis points. That’s probably partially because it rallied 4.43% on Friday. It’s likely a lot of the worst hit stocks outperformed on Friday.

The table below reviews S&P 500 forward performance after weekly corrections. Stocks usually do well in the following week and the following 12 weeks after corrections. But less so in the following 4 weeks. That’s probably because stocks have an initial period where they rally back sharply. Then the market fully digests the negative information and the rebound. 

Finally, it continues higher. Specifically, after a week stocks rally 3.53% on average and are up 85.7% of the time. After 4 weeks, they rally 2.92% and are up only 57.1% of time. Finally, after 12 weeks, there have 4.59% gains on average and stocks are positive 71.4% of the time.

The stock market did so well that every sector was up and 4 were up more than 5%. Utilities, tech, consumer staples, and real estate rose 5.86%, 5.7%, 5.48%, and 5.06%. Utilities made up for lost ground. Long bonds have been rallying while stocks and the utilities have been falling. Energy sector only rallied 2.95%. That relative weakness likely contributed to the worst decile in the correction doing the worst on Monday. 

As you can see from the chart below, the S&P 500 yields above the 30 year treasury yield by the most since 2009. Apple once yielded more than the 10 year yield. Hopefully, stocks aren’t relying on low yields too much because yields will likely spike in the coming weeks.

Amazingly Impossible Rally In The Long Bond

Long bond is due for a big decline soon. It is way overbought beyond belief. 10 year treasury yield is at 1.11% (near record low) as it fell about 5 basis points late in the evening on Monday. As you can see from the chart below, the 10 year yield is 4.14 standard deviations below its 6 month average. That’s the lowest z score on record. 

TLT, which is a long bond ETF, reached a record high on Friday and fell slightly on Monday. It likely will increase to a new record high on Tuesday if the rally on Monday evening holds. 30 year yield is down to 1.68% as it fell 4 basis points on Monday evening. This is also a near record low.  

Dem Primary Update

It appears Joe Biden now has momentum. He gained more momentum on Saturday when he won the South Carolina primary over Bernie Sanders by 28.5%. He gained even more momentum on Monday when Amy Klobuchar and Pete Buttigieg dropped out of the race and endorsed him. Steyer dropped out on Saturday. Biden also got an endorsement from Beto O’Rourke. 

The race has changed dramatically from where it was last week. Now PredictIt shows Joe Biden has a 45% chance of winning the Dem primary and Sanders has a 44% chance. They are almost even. On February 23rd, Sanders had a 65% chance. On February 11th, Biden had a 7% chance. Bloomberg has gone from a 33% chance on February 13th to a 7% chance.

538 primary forecast shows similar results. A big difference is it includes ‘no one’ winning the majority which is the front runner by far. Specifically, there is a 63% chance ‘no one’ wins the majority. There is a 21% chance Biden wins and a 16% chance Sanders wins. Also, there is a 48% chance Biden wins the plurality and a 52% chance Sanders wins. 

Biden’s momentum can be seen in the Morning Consult national poll. From February 26th to the 27th, the poll showed Sanders up by 12% over Biden. On March 1st, it showed Sanders with a 3 point lead. That poll included Klobuchar with 3% and Buttigieg with 10%. 

If most of those supports switch to Biden, he wins the poll. The Tuesday elections will clarify this race further. Sanders will likely do well, but the odds of ‘no one’ winning the majority will stay high.

When Amy dropped out and endorsed Biden, healthcare insurance stocks ramped. IHF ETF was up 5.58% on the day. It would have been up more if it was reported during normal trading that Pete would endorse Biden. Many now think that Biden will win the nomination. 

The post Long Bond Is At An Extreme Level appeared first on Theo Trade.

Source: First Rebuttal

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