Dr. Kaminsky (by Leaf_West)

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Gary Kaminsky does a reasonably good job on CNBC … it helps that he was a money manager in a previous life (as I was).  I mention him as he quite frequently mentions how the bond market is signalling one thing (economic weakness) and the stock market signalling the opposite.

Let's take a closer look at the relationship between the 10 Yr Treasury yields and the S&P 500:

Daily Chart:

$TNX_August 20, 2011_vs SPY

It's pretty clear from the above chart that the bond yield often gives an advance warning as to a change in trend for the equity markets … let's take a closer look at the past couple of important swing tops/bottoms.

August 8-10th Swing Bottom – 15 minutes:

$TNX_August 20, 2011_vs SPY 15min_02

Now I lined up the SPY and 10Yr bond yield charts but there is an 1-hour discrepancy at the end of each day when the bond market closes before the equity market.  Where necessary, I jutted the line to make the times match up.

Interesting things to note on the charts … when the bond market closed at 3pm on the 9th of August, equities ripped higher for that last hour gaining over $2.50 per share for the SPY.  When bonds opened lower in yield the next day, that was your signal to expect equity prices to decline at the open.

Bonds gave the all-clear signal when they broke above their consolidation pattern at 10:30am eastern on Aug 11th, followed by equities at 12:30pm that same day.

August 16-17th Swing Top – 15 minutes:

$TNX_August 20, 2011_vs SPY 15min_01

Bond yields broke their consolidation pattern (symmetrical triangle) at 12:15pm on Aug 16th … equities were pulling into a near-term low just after this time.  Equities quickly found a bottom and started to move higher for the rest of the day and at the start of the next day (Aug 17th).

Bonds never really gave a signal of strength however … yields had moved below the 20/50EMA's on the breaking of that triangle the day before and by the time yields finished their weak bounce on the morning of the 17th at 10:15am, equities had made a new high for the current move (with weak volume) …  CLEAR DIVERGENCE.

Bonds rolled lower for the rest of the day and during the last couple of hours during the day made a classic sideways bear-flag pattern.  Equities had also moved lower and made a rising bear-flag pattern into the close.  CLASSIC WARNING SIGNS FOR EQUITY WEAKNESS.  I must admit that I was paying too much attention to individual stocks to note the signals that bonds were giving us at that time.

How about the action from Friday … what is it telling us?  Note how yields actually bounced off of their early morning lows.  Yields actually ended the day above the mid-point of their daily range while equity prices ended at their lows.  Yields did break the supporting trend line near the end of trading but to me price needs to close beneath that red dash line at 2.069% first thing Monday morning or else I am thinking that we should expect equities to bounce.  I am thinking that this divergence in equity prices on Friday may in part be due to Friday being OpEx expiry date but I think it is more related to investors/traders not wanting to take home positions into the weekend for protection against European news events.

Anyways, I hope this little discussion helps people understand what Gary Kaminsky is talking about when he mentions bonds not confirming the equity action.

Cheers … Leaf_West (visit my blog)