Yields Are Rising, Equities to Face Headwinds
Several weeks ago, I outlined my road map for the next couple of weeks, and this centered around rising Treasury yields. So far this "call" is looking good as yields on the long bond are starting to show some life after 4 months of being crushed. Rising yields at the long end of the curve just may be a response to QE2 and the perceived inflationary effects or it just may be the result of a smaller than expected asset purchase program. In any case, we have rising yields and strong trends in crude oil and gold, and it is this combination of factors that is likely to act as a head wind for equities.
Figure 2 is a weekly chart of the S&P500, and the indicator below is a composite indicator that assesses the strength of the trends in gold, crude oil and yields on the 10 year Treasury. In all likelihood, this indicator is going to end the week at or above the high inflation line, and this should be a headwind for equities.
Figure 2. S&P500/ weekly
I have developed a trading model utilizing the 40 week moving average and this indicator as a "fundamental" filter that easily beats buy and hold and a simple moving average model. I have discussed this model at great length in the following articles:
Developing A Trading Strategy (Part 1)
Developing A Trading Strategy (Part 2)
Developing A Trading Strategy (Part 3)
In all likelihood, this trading model will give a sell signal at the end of this week.
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