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Amid Stock Market Euphoria, the Smart Money Is Fading


Perhaps the smartest of the smart money operate in the US Treasury market, where the most glaring divergence is occurring.

This 1.85% level in the 10-year is a critical pivot level going back to when it was first hit back during the August 2011 equity market mini crash. Regardless of direction a move from this level must be respected for what it portends about the state of the markets and economy.

Ten-Year Yield

Next week we will get the two most important monthly economic data reports in ISM manufacturing and non-farm payrolls. In addition we will get meetings from the newly uber-dovish Bank of Japan which is expected to launch an aggressive QE campaign, as well as the ECB, which is dealing with its own set of issues. With the 10-year sitting right on top of the key 1.85% pivot you might say this is one of the most important weeks of the year for bond market investors. If the 10-year can hold this 1.85% level amidst the stress of what appears to be improving economic data, a breakout in stocks, and exceptionally easy global central banks, you have to believe that the bond market is reflecting a dynamic that no one yet sees.

I was very skeptical on bond market performance entering this year and laid out a scenario where a monumental bull/bear battle should occur. Not only did I get the price objective test much sooner than expected, but also I got the corresponding rhetoric and interpretation of a seismic asset allocation shift that was under way only adding to bearish bond market sentiment and pressure. However now that the quarter is in the books and the smoke has cleared, the bruised and battered bond market bulls are still standing and have actually rallied back to near the highs of the year.

From where I am sitting the bond market is making a very bold statement that should not be underestimated. This past quarter the bonds were set up to reverse the rally and finally push yields higher towards more normalized levels but they just couldn't do it. We can try to rationalize this price action with such things as the Fed buying, a European flight to quality, or a great rotation front run short squeeze. However at the end of the day the stock market is at new highs and bond yields are falling. These markets are offering very different interpretations for what is going on and they can't both be right. The smart money seems to be fading the stock market euphoria and my money's on them.

Twitter: @exantefactor
No positions in stocks mentioned.
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