DAY HAGAN TECH TALK: “REVERSION TO THE MEAN IS THE IRON RULE OF THE FINANCIAL MARKETS” ~JACK BOGLE

 

The S&P 500 (SPX/2978.43) “probability roadmap” highlighted in last week’s Tech Talk report was resolved… higher! When combined with other technical measuring tools, specifically Advance-Decline Line analysis and percentage of SPX stocks above 200-DMA, the underlying technical backdrop remains supportive of higher equity prices.      

Yet, in consideration of Jack Bogle’s words (similarly phrased by Bob Farrell: “there are no new eras—excesses are never permanent”), I want to turn your attention to the levels to which the 30-Year and 10-Year U.S. Treasury Yields have fallen. 

30-Year U.S. Treasury Yield (2.11%): Following a major decline much like what occurred between 2007- 2008, 2011-2012, 2014-2015 and 2015-2016, the 30-Year U.S. Treasury Yield recently tested and held a long-term support line (green line below). In the past, this kind of activity produced a fairly large move to the upside.  

30-Year U.S. Treasury Yield Index: 13 year weekly chart with 30 week and 40-week moving averages.

Viewed from a “price” perspective (thank you, Kimball Charting Solution) versus a “yield” perspective (first chart), the iShares 20+ Year Treasury Bond (TLT/143.20) has rallied up to two different resistance lines—dashed red lines on the chart below. My interpretation of this is that, at a minimum, some type of breather is due. At some point in the not-too-distant future, a mean reversion move down towards one of the moving averages shown on the chart below may occur.

iShares 20+ Year Treasury Bond ETF. Nasdaq GM + BATS. 10 year weekly chart with 30 week (blue line) and 40 week (red line) moving averages.

10-Year U.S. Treasury Yield (1.63%): The 10-Year U.S. Treasury Yield has fallen to—or close to—levels which, in the past, have produced a mean reversion move higher. In this case, I’d focus on the declining 10-week moving average (blue) and the 30-week moving average (red).

10-Year U.S. Treasury Yield Index. 11 year weekly chart with 10-weekly (blue line) and 30 week (red line) moving averages.

Additional Charts of Interest

S&P 500: Let’s keep resistance levels (areas where selling pressure exists) in the forefront. A good thing about the late July to early/mid-August pullback is that it allowed the solid red resistance line —which proved to be an accurate level of resistance in late July—to extend further up and to the right—chart below.

S&P 500 Large Cap Index. 21 month chart with resistance (red lines) and 150-DMA support (green line)

On a more tactical (near-term) basis, the following guideposts may be used to measure the strength of the SPX’s move up off the early/mid-August lows:

  • Cyclical sectors that have been out of favor/underperformed (Industrials, Consumer Discretionary, Financials, Basic Materials and Energy) start showing leadership qualities—their relative strength trend versus the SPX starts rising. This occurred yesterday, 9/9/19.

  • Small-Caps start outperforming Large Caps. This occurred yesterday, 9/9/19, and the Small Cap A/D Line is only two net advancing issues from an all-time high!

  • The SPX’s topside gap (support) from 9/5/19, between 2961 and 2938, doesn’t get filled.    

S&P 500 Large Cap Index. Initial Support (“Gap Support” - blue box) is between 2961 and 2938.

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UPCOMING EVENTS

Day Hagan Market Update Webinar with Donald Hagan, CFA, September 11, 2019 @ 4:15 PM EST

Day Hagan Technical Analysis Webinar with Art Huprich, CMT, September 17, 2019 @ 4:15 PM EST

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

— Written 09.09.2019. Chart source: StockCharts.com, unless otherwise noted.

PDF Copy of Article: Day Hagan Tech Talk September 10, 2019 (PDF)

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