Key Tactical Takeaways:
> After tightening stops on profitable longs in anticipation of the coming end to the most aggressive stage of the post-09/24 rally, this morning's risk-off tone appears to suggest that the expected final thrust higher in US equities will not occur. Near-term, however, the prevailing trend will not shift from up to sideways/lower until SPX settles below 3424.09.
> The German DAX has gapped below bullish NT trend support as bund yields have collapsed to 5-month lows, lending credence to the recent addition of EWG to our list of short ideas.
> While technology has recovered relative to utilities in recent days, this improvement has yet to fix the longer-term trend damage done to the risk vs. risk aversion picture over the near-term.
> Since we've tightened our stops of late, we'll be taking profits on our AVTR and NVTA positions at the open today. On the macro side, we'll be taking a small loss in FXY, after adding a short in EWG at yesterday's open.
Some Quick Thoughts:
Between the ongoing "gamma squeeze" in the big names that are so heavily weighted in the major indices and novice traders chasing the hopes of the next stimulus package that is being dangled in front of them, the major indices staged an overshoot in the absence of bond market investors on Monday. Admittedly, Monday’s price action duped us into believing that one more good rally to complete the 3rd wave up from the 09/24 low was in the offing. While bulls did hold the exact line in the sand (our ST stop of 3479.15) needed to keep that scenario alive on Wednesday, this morning's risk-off move threatens to reverse the bullish short-term trend.
As a reminder, the strong correlation between the S&P 500 and inflation expectations has moved to the top of our toolbox in recent days, because of the mature-looking wave structure in the 5-Yr, 5-Yr forward rate. As that rate has started to roll over in recent days, and as German bund yields are collapsing to 5-month lows this morning, the benchmark US 10-Yr yield is threatening a violation of its key near-term trend stop at 0.71%. We trust the bond market far more than we do the trend chasers over at Robinhood. Therefore, if we see the 10-Yr close below 0.71% with an S&P 500 close below 3479.15, it will signal that the period of markedly higher pre-election volatility we’ve been anticipating has begun a few days ahead of schedule.
Speaking of Germany, you'll recall that during the early stages of the post-09/24 S&P rebound we suggested that we'll be looking for an opportunity to get short Germany. Well, we added a short in EWG at the open on Wednesday. Now, this morning's gap below bullish near-term support by the DAX as business and social restrictions start to hold again lends credence to this trade.
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