10 Yr Breaches 3% and the Bottom Falls Out!

  
 
So, the headline in yesterday’s note said:
 
“3% Yields, Not Yet, Falling Yields Send Futures Higher – Try the Dover Sole” 
 
And the WSJ ran with this headline: 
 
“Stocks Lethargic as the 10 yr Treasury Yield Nears 3%”
 
And so, it was – the nervousness that had permeated the mkts on Monday – about what would happen if we were to hit 3% on the 10-yr. failed to materialize (on Monday) …. but boy did it happen on Tuesday!  At 10 am Tuesday – yields on the 10 yr poked its head thru 2.999% and then BOOM!  3% here we come and that is all the algo’s needed…and in the final paragraph from yesterday I said -.
 
“If yields continue to fall – then expect the algo’s to go on a shopping spree – but if the 10 yr yield begins to rise and once again kisses 3% then my guess is that the algo’s will turn on you – and the buyers will back off leaving that ‘liquidity void’ in the mktplace.  Just sayin…”
 
And Today’s WSJ headlines with this:
 
“Stocks DROP as Treasury Yield TOUCH 3%” –
 
and DROP they did (more on this later).....let’s say 600+ pts on the Dow by 2 pm, 50 pts on the S&P and 165 pts on the Nasdaq.....or 2.5%, 1.9% and 2.3% respectively.....all managed to recoup a bit of those intraday losses by days end - but still ended the day substantially lower....Funny how the mood changes from one day to the next.....Tuesdaymorning brought us those great, ‘blow the roof off the house’ earnings numbers from some of America’s greatest companies - CAT, 3M, etc...all numbers that on the face of it gave you a sense of ‘invincibility’ - like ‘can it get any better than this’?   I mean WCGW?  (What Could Go Wrong).  Get ready……here it comes….
 
 The headline says it all......3% yields on the 10 yr and 2.49% on the 2 yr - are both issues that have spooked the mkt and are spooking the mkt.....Now you say - ‘Ok - but 3% yields do not compete with the stock mkt over the long term  - Ok - maybe that is true, but 3% can compete with a mkt that is returning negative growth so far this year......- The DOW is down 2.8% ytd, the S&P is down 1.5% ytd, while the Nasdaq remains positive at +1.5% ytd and the Russell is flat on the year….Hmmmm – maybe 3% ain’t so bad!
 
The fact is that 3% yields are 51% better than the 1.974% yields that the 10 yr treasury was returning in August 2011…. and if you are concerned about FUTURE economic growth or a stock mkt that could STUMBLE then 3% on part of a portfolio offers some stability in what could be a rocky road ahead…… and we can see this in the money flow data for ETF’s.  As my good friend Nick Colas points out in his ‘DataTrek Morning Briefing’
 
“Over the last month, redemptions out of US equity ETF’s have totaled $868 mil.  In the same period, ETF’s that invest in short term (less than 3 yrs) fixed income instruments have totaled $5.2 bil and the YTD numbers show a similar story, with $10.3 billion of inflows to short term bond ETFs and $6.2 billion into US equity products.”
 
Thus, the pressure on stocks....and if that wasn’t enough yesterday - you had the CFO at CAT (a great American company) come out and say that the 1st qtr probably represents the highs of the year - or as he put it - “the 1st qtr would be the HIGH-WATER MARK for the year” and 3M (another classic American company) CUT year end projections - suggesting - Could this be as good as it gets before the next downturn?  And BOOOMMM! - the bottom fell out - before you knew it - the mkt plunged and the VIX soared - now just to be clear (this is the follow up to the DROP) - there was no panic - this was not a ‘toss everything out the window’ kind of day - by any stretch....
 
If you have been following my comments recently - I have tried to explain this new 21st century mkt structure ‘thing’......Yes - technology has made the delivery of order flow more efficient but it has also made the execution of that same order flow across 10 exchanges and 50+ dark pools more volatile as the speed and connectivity allows these off floor ‘market makers’ spread across the country to take their ball and go home when the going gets tough.  And go home they do – thus the vacuum in bids (going home meaning that they cancel their bids and become sellers like everyone else – in complete defiance to what their role is) …. Now UNLIKE THE MKT MAKERS here at the NYSE – they CAN’T TAKE THEIR BALL AND GO HOME…they are here for the duration, they are here for whole game. They are buyers when everyone else is a seller and because of the fragmented mkt structure we have today – their role takes on even more importance in a falling mkt – yet they cannot stop the bleed once the algo’s get all worked up and so they do the best they can to manage the process. 
 
And it started……the algo’s became confused…. Isn’t 3% supposed to be BULLISH?  Shouldn’t we be buying this move?  But no – the headwinds that have been toying with the mkt suddenly whipped up…and the storm began – liquidity began drying up, in line bids disappeared and sell side algo’s started to get antsy…….…. now while it all started off slow – it quickly picked up steam once the CFO at CAT opened his mouth….and started detailing their earnings in a conference call…
 
Oh boy…that ain’t good…..and BOOMMM – just like that the ‘feel good’ tone that had enveloped the mkt in the pre-dawn hours began to fade….and fade….and fade…..and by 10:20 went from Green to Red….only to challenge the unchanged line at 10:45 we went positive and then again at 11 am it broke lower and churned near the unchanged line….at 11;45 – she couldn’t hold on any longer and the move lower intensified…..the in line bids gone…..and all of those ‘LIQUIDITY PROVIDERS’ tuned into ‘LIQUIDITY TAKERS’ and the bottom fell out …by 2:20 pm we hit the lows….. I could go on and on…but I’m running out of space….
 
 
Now yesterday at the lows – we were about to test the long-term support (200 dma) on the S&P at 2607…. (yesterday lows were 2617).   This morning US futures are DOWN another 10 pts as we prepare to KISS it today…. 10 Yr yields holding above 3%. 
 
The key today will be if the mkt holds at the long-term support…. will the buyers defend it?  This will be the 3^rd time since February that we test it…. (now the period from 3/23 – 4/6 is one period) and this will be important.  If we FAIL to hold here then the February lows of 2539 are in sight….and that would be another 2.6% from here…. just sayin….
 
Overnight global mkts all lower in sympathy with the bloodletting that happened here…. Asian mkts closed lower – Japan – 0.28%, Hong Kong – 1% and China – 0.38% - Australia closed for holiday. 
 
In Europe – those mkt centers are under pressure as investors digest 3% yields on 10 yr treasuries…. FTSE 0.61%   CAC 40 -0.76%, DAX -1.61%, EUROSTOXX -1.02%, SPAIN -0.53% and ITALY -0.84%.
 
Brace yourself for more earnings…. TMO, ANTM, CMCSA, BSX, NOC, TWTR, GT, and after the bell look for FB (or is that FACEPLANT!) 
 
Oil is up 0.12 at $67.72 after yesterday’s decline of over $1…. – at it failed to breach the highs set last week at $69.55 – which is also the short term trendline and while I don’t think it is collapsing by any stretch – I do think it will struggle here for a bit.     
 
Gold is DOWN $7 at $1,325 as it bounces between support and resistance at $1,325/$1,337.