What a day! Once again, only the last hour action mattered today.
Yesterday’s rally in the last 10 min of trading was attributed to redsitribution of about $5b investment among S&P components due mainly to Budweiser’s exit from the index. The explanation was a bit complex and I did not make any attempt to understand it.
As I have mentioned in my post yesterday, Alert: Big Rally in T-Bonds, crashing bond yields did lead the stocks lower today. Today was another big day for T-Bonds. The closing yields are as follows:
- $FVX (5-year) 2.091, down 4.74%
- $TNX (10-year) 3.391, down 4.07%
- $TYX (30-year) 3.972, down 4.15%
These moves are huge for a single day. So far this week the T-bonds have staged about 10% or more rally, which I interpreted as flight to safety. It has been my observation that “crashing” Treasury yields always led the stocks lower (see chart). In fact, the selloff in equities during the weeks ending Sept 15, Oct 10, Oct 24 and Nov 7 followed a quick 7% or larger single-week crash in 10-year treasury yields.On the contrary, rising yields need not necessarily translate to rally in equities.
Today’s selloff was led by financials, which absolutely got decimated. JPM, BAC, C, and MER – all set new 52 week and multi-year lows. Bank indices XLF and UYG set new lows where as Ultrashort Financials, SKF set an all time high. This weakness in financials does not bode well for the equities in the ensuing trading days. What’s worse is that this selloff happened on a relatively low volume, which only means that the selling may not be over yet. In fact, the volume on SPY on last Thursday’s 800 point reversal was over 740 mil. Today it was a respectable 558 mil.
I don’t have a clue when this selling will stop. For reveral signs, I will look at a big spike in volume combined with a new major high in VIX (above 90).
A personal note: When in doubt, I always revert back to what worked for me. Yesterday and today, I paid full attention to how treasuries were doing. I didn’t rely on stock charts at all. Nor did I rely on Tony C’s experience. Rather, I went with my instincts. This is why as of mid day yesterday, I abandoned my “options week rally” position because treasuries were telling me something different. As they say, that is one in a row for me. 
My current positions: EEV and DUG, and puts on UA, COF, APOL, SAP and PCLN
Good call being nimble. That is most important.
Good post this eve Mohan. I plan to get out of EEV in the AM. Been holding it since last Thurs and this many down dys has me a little nervous about staying short. More fed manipulation on the horizon. That’s the plan for now. May reconsider in the AM. Anyway, thanks for taking the time to write this up. I continue to learn from this site.
Great post Mohan. Thanks for all of the analysis you share…it’s extremely valuable to this site.
Since financials have been leading this fall, when the market turns do you think they’ll lead back up? I thought that they should have fallen out of the spotlight in July, but they still lead the market. Do you see that changing this time?
Citigroup’s tangible book value is roughly $5 and it’s trading at $6.50 right now. People will rush in if it gets to book if for no other reason than it’s backed by the gov’t. The question is, will they go to other sectors first that have been beaten down less?
Citigroup may be worth $-5. Take a closer look.
Tom,
Thanks for your valuable contribution. Every bank in the world probably has a negative real value b/c of all of the worthless ABS crap that they have on their books.
In the meantime, does anyone have any TA that supports a possible move UP in financials? Fundamentals don’t matter in a dead cat bounce, so I’ll leave that “closer look” to Tom.