Juggling Dynamite

The risk trade is coming off with a vengeance today. Equities, commodities and the C$ are all selling off on significant volume. As referenced here last week the 10-year Treasury yield that breached 2.60 last week this morning cut through 2.50 like butter.

The last cycle yield low of 2.07 in November 2008 is now back within sight. The ramifications of this are many. An important point is that the 10-year treasury yield tends to bottom about 2-4 months in advance of the stock market. The last yield bottom in November '08 preceded the stock market bottom in March 2009 by 3 months. The second issue evident here is the extreme rapidity of market moves in this environment. Trends that traditionally take many months to play out today move in a matter of days and weeks. This is what makes this climate so dangerous for passive allocations and traditional (read antiquated, unenlightened, arguably reckless) concepts of portfolio management.
The technical breakdowns across risk assets since April are significant and are ignored at great risk of peril. Even after the year to date declines, stock markets are today at nose-bleed premiums to where they bounced in March 2009 and even November 2008. The downside risk is looming large for capital left to drift here. The next test area for the S&P 500 on a closing daily basis is 1010 which would be 17% below the April 2010 high.

If it doesn't hold there (and we fear it won't based on the downside momentum presently in the semi-conductor index among many other leading indicators), then the next test will be 950. Look out below.

Dr. Doom this week updates in a 20 minute audio clip here.

Economist Gary Shilling has been correctly predicting deflation and a rally in long bonds. In this recent talk with Tech Ticker he updates on what he sees still coming in these trends. He also rightly underlines the ridiculous comments some make about long bonds being riskier than stocks. The key point is that neither is a “buy and hold” type of investment. Once bond yields bottom out long bonds will need to be sold to protect price gains. This goes without saying. You can't passively and perpetually hold stocks or bonds if you intend to make gains and keep them.