Verdict Of The OpEx: Consolidation Ends Soon; We Sell Dow, Russell, And Gold If Bond Yields Fall Further

  • The terminus of Wave 2 in the equity markets coincides with OpEx on Friday, leading to a moribund session, but provided exciting finish to the trading day and week.
  • We've been positioning for the onset of Wave 3 trend to the downside, more selling at breach lower of Wave 2 supports, with a specific focus on shorting Dow, Russell, Gold.
  • It's clear that given recent declines in yields, there's a lot more lower adjustments in risk assets. It's also clear that the most vulnerable are Dow, Russell, and Gold.
  • The bond market has always been the real indicator which we have learned to trust over the past 5 decades of being in the market. This is the market that is attuned the closest to the real fundamentals. And right now the bond market is telling us a readjustment will be happening soon in the stock markets, whether they like it or not, or even whether they know it or not.
  • Russell remains elevated, simply because of the narrative that the Blue tsunami will rule uber alles and yields will have to inexorably shoot to the moon. But that is a story that is relevant in the medium-term, not in the near-term, when we still have the likelihood of a divided US Congress, a new brush with a recession in Q42020 - Q12021 time frame, and a new wave of COVID-19 emergency measures.

This article is a follow-through to the recent article we wrote on November 16, 2020: ("The Equity Market Outlook Until The First Half Of December 2020 Is Not A Pretty Sight, Liquidity Wise").

The variable response of risk assets to the recent fall in bond yields

We were comparing the variable ways risk assets have responded to the recent decline in bond yields, the study done during the same market time frame. It was an eye-opener, and this comparative study has provided a basis for future expectations and market strategies.

We lined up the risk assets on the basis of which ones should make adjustments the most relative to the recent declines in the 10yr yield (chart below).

10yr yield

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RTYZ0 (Russell 2000 December/20 futures)

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YMZ0 (Dow Jones Ind. Ave December/20 futures)

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GCZ0 ( (Gold December/20 futures)

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ESZ0 (S&P 500 Index December/20 futures)

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NQZ0 (Nasdaq 100 December/20 futures)

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It's clear that given the recent declines in yields, there's a lot more adjustment that has to be done by these assets to the downside. It is also clear that the most vulnerable, based on this narrative, are Russell, Dow, and Gold. In fact, December 2020 gold futures fell below 1850 support and has been gravitating lower since then.

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