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What The 10-Year's Death Cross May Mean For Stocks

August 5, 2014

In short: A Correction.

And after the highly bearish trading action of late July, this is worth considering with the “what’s next” question front and center for most investors. There’s little doubt that the slicing of the S&P500’s 6-month uptrend was vicious, but it may be less clear what it will mean going forward.

This is where the 10-year yield’s Death Cross enters the equation as a handy tool - or “tell” – on what may be ahead for the S&P500 and help answer the question above.

​Typically charts tell the story better than words can and this appears to be one such time in looking at longer-term daily charts of the 10-year Treasury yield and the S&P500 together.

In the case of the 10-year yield, however, this is actually a bullish signal for bonds with price trading inverse to yield as investors pile into the safety of Treasurys. Not surprisingly, many of those same investors “pile out” of riskier stocks as shown by the long black arrows pointing to the formal corrections that have occurred after or around the 10-year’s recent Death Crosses. 

Put otherwise, the 10-year yield’s Death Cross has proven to be a pretty significant risk-off shot across the bow over the last decade and this is true before, during and after the Fed’s rounds accommodation.  

After all, the S&P dropped 58% after the 2007 and 2008 Death Crosses in the 10-year yield, 17% in conjunction with the 2010 Death Cross and 20% after the 2011 Death Cross. 

Clearly, it was the first Death Cross that was truly invaluable to investors who heeded its bearish risk-off sounding, but the other two were helpful as well with a quasi-Death Cross in 2012 not treated here.

​This matters today because the 10-year yield put in a Death Cross back in early April of this year.

​In turn, it suggests that “behind the scenes” of the S&P500 and DJIA carving out new all-time highs for much of this year on what charts out as “noise”, some investors have been moving toward safe haven assets and probably for a reason. 

​Looking back at that asset class shift back in 2007, it is pretty obvious what the reason was and it makes those investors who moved toward safety early look smart. 

Today there are many reasons why some investors have been moving toward safe haven bonds but from the perspective of the charts, it doesn’t matter what the “what” turns out to be. It is more important to take notice of this shift on the risk continuum toward safety with the move away from risk likely to come just as it did in 2008 and in the summers of 2010 and 2011.

In turn, it is possible to plan to position portfolios accordingly ahead of the brunt of a potential correction rather than get sideswiped during this possible event with the charts of the S&P500 suggesting at least a sub-1600 correction may be ahead.

Returning, then, to the S&P500’s bearish trading action in the last week of July, it is very likely to continue and to intensify based on what the 10-year yield’s Death Cross may mean for stocks.

As always, thank you for taking the time to read this month’s piece.


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