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Short-Dated Rates And The Investor Paradox - Morning Market Squeeze

Key Tactical Takeaways:

> While the US $ Index appears poised to be beaten down to the area of ... over the next ... days, such a drop would complete 5 waves down from early November, setting the stage for one of the largest corrective $ rebounds since late September.

> Given the correlations currently at work (see page 7), the aforementioned $ sell-off and subsequent rebound would apply tactical pressure for another countertrend dip in stocks, in the event the SPX shoots to new highs early this week.


> Treasuries are under pressure this morning, after last week's rebound was stopped right at the bearish near-term line in the sand. If rates are going to move into a new regime above ...% in early 2021, it has to start from here.


> We will be going long ... at today's open (as per record keeping rules), with an initial target of 20.50 and a stop of 14.61. Premium members with access to the private @XtractPremium Twitter account will be updated on more favorable entry points.


Some Quick Thoughts:

It's not often we spend time talking about short-dated Treasuries. However, the current situation facing short-dated Treasuries highlights some of the paradoxes facing investors, and not just those in fixed income, but those across asset classes. By dropping just 6.5 basis points over the past month, from 0.18% to as low as 0.115% on Friday, 2-year note yields have swung from 5 ½-month highs to 4-month lows. One of the issues is that Treasury is holding about of 1.5 trillion cash, waiting for Congress to authorize another round of fiscal stimulus that so far is still awaited. And the government is under growing pressure to start spending this cash rather than maintaining such high short-dated debt auctions.

One of the elements at work in the market is that investor cash levels are so high that any reduction of bill issuance could cause a big enough supply/demand imbalance to push T-bill rates—mostly trading between 0.06 and 0.08 bps currently—negative at some point in early 2020 and drive 2-year note yields toward zero. The high levels of cash and falling yields are significant considerations for investors in all asset classes. This highlights the fact that there are still huge amounts of funds defensively positioned, that there are still large amounts of risk-skepticism despite some signs of short-term trading excess in equities and that fixed income offers little competition to riskier assets.


Although the VIX is lower this morning by 4.3% (as of this 8:15 ET writing), the current reading of 22.3 is still a level that, historically speaking, is elevated. While this is a reflection of some of the nervousness that lies beneath the surface, record levels of call vs. put buying reflects the confidence that retail traders have gained from unprecedented levels of monetary manipulation.


For the S&P 500, our daily backtest of tactical conditions on page 2 reveals one of the more bullish 1-day setups we've seen in a while. This comes as the US $ Index appears poised to be beaten down to the area of ... over the next ... days. It can be argued, however, that such a drop in the buck would complete 5 waves down from early November, setting the stage for one of the largest corrective rebounds in the dollar since late September. Given the correlations currently at work (see page 7), such a rebound would put tactical, countertrend pressure on any early-week surge to new highs in the S&P 500.


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