Equity Counter-Trend Rally In Place; Yields Bottoming Out; DXY Resumes The Uptrend

This actual Market Report was written pre-NY market opening, on Tuesday, March 26, and was updated until the NY market closed.

Here is the Market Report At The Chat, March 26, 2019.


The bounce in pre-NY trade was larger than I expected. But the models trump EWP in this instance -- they got it while yours truly was made to look clueless.


So we get are getting a bounce, and I presume that is now Wave 2 proper. The next stage, another hopefully sharper decline, may come tomorrow.

The key to the larger than I expected recovery, were the yields, which have come off the lows. And with USD/JPY looking frisky to the upside.


I expect the yields to rise further in line with the models dealing with yields. In fact, the change rate in yields is starting to rise, telling me that the actual turn up in the 10yr yield is just a day or two away,



This presents a kind of conundrum because we are expecting further equity market declines, while the yields are starting to turn around -- if we go by the models.

But maybe we SHOULD expect that to happen, because the two asset classes (bonds and equities) have been diverging significantly since early January when the recent bull phase started.


RM13 @RM13 Mar 26, 2019 9:35 AM

Well, let's see where it bounces...

But regardless your models suggest upside is limited in US equity up model until early April


Well, @RM13, the downside in equities is likely to make a trough sometime just before mid-April (April 9-10 optimal), and the equity mini futures will probably be up another day from here. So it makes sense (at least to me) that the divergence shown in the chart above will narrow. And my guess is that yields will rise and equities will fall.

It will not be a constant process -- the reversion will likely occur in stages. Just look at the way both yields and equities performed from the October peak in stocks.

If I put the S&P Index in juxtaposition with the 10Yr yield in the Bond Model chart, you can see the emerging dynamics could make these two asset classes re-adjust to a mean.


No change was made in the bond chart -- I just put in the S&P Index and removed some other data (the change rate of the 10yr yield for one), so we can see the relationship clearly.

What you can see is what I have been saying earlier about asset rotation, or at least the lags/leads they exhibit in responding to the inflow/outflow of liquidity. In this case you will see that equties are first repsonders, yields come second, then gold and DXY follow the yields.

Let's do a zoom in for better optics.



SPX change overs have always been ahead of the changes in yields, I suspect the yields this time are still catching up to the equities previous up phase.

This relationship will likely become clearer as yields turn up, the SPX continues falling for a while. And then both of them turn up when the stock markets goes into another huge rally (yields rally in a big way too) sometime in second half of April.

This we have to keep in mind as we track the assets in the immediate time frame. And right now we are being led to a time and level when/where we can possibly benefit from leveraged positions. That is the wave 3 sequence of the fives, which I expect will be seen starting tomorrow.

Meanwhile, the US Dollar is responding to the liquidity flow imperatives.



If the models as correct, today marks an intermediate low for DXY (see chart above). We should see a DXY rally, which would get tail winds from another day of recovery in equities tomorrow.



The optimal top for the DXY (per liquidity model) is the period of March 28-29. the then DXY falls sharply.

The DXY decline should catch up with the fall in equities -- and rising yields (if they will do it) may be of no help during that time to the DXY.

There may be another reason, and that is the DXY responds to a previous dislocation in the term (money) markets.



Of all the assets, the US Dollar is most sensitive to the SOMA activity of the NY Fed Reserve. Its relationship to the liquidity flows/outflows is solid, but there is nothing like perturbations in the short term market rates that could send the dollar (DXY) going bat-crazy for a brief period of time.

That chart by the way, I just got from my recent Dollar article at the PAM main site, if you want to know about it,



And the US Dollar (DXY) has the best frequency response to liquidity flows. The fidelity is amazing, so much so what when I am having trouble with the other assets classes, I frequently revert to what I know about the DXY's relationship with other asset classes (with the DXY-liquidity covariance as benchmark).

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Disclosure: I am long SLV, UUP, CRAK, DRIP.

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Alan Longbon 1 year ago Contributor's comment

Good one Robert.

Alexa Graham 1 year ago Member's comment


Robert P. Balan 1 year ago Author's comment

Hey Alan,

Thanks for steering me to TalkMarkets. You were on holiday?s?

Alan Longbon 1 year ago Contributor's comment

Yes on holiday but back now.