Thursday, November 21, 2013

$YC2YR Treasury Notes Yield Curve 2-10 Spread Daily Chart

The chart above shows the 2-10 spread at 252 basis points (the spread between the 10-year yield now at 2.79% and 2-year yield now at 0.27%; 279-27 = 252). Keystone's 2-10 Spread Indicator (type this into the search box at the right to bring up prior articles on the 2-10 for further study) uses the 255 spread number as the happy signal for the banks. As the yield curve steepens, the spread rises, and banks are happy since they can make more money taking advantage of the yield differential. Keystone uses 255+ to signal that happy days are ahead for banks which makes this current value all that much more interesting. A major decision has to be made.

Traders are tripping over each other to buy banks and the financial sector believing that banks will lead the stock market to new highs. Perhaps they will be correct, perhaps not. The up in yields whips traders into a long side frenzy since they sniff out the steeper yield curve and happy banks ahead so they rush in with both feet, however, the 255+ is not yet achieved; so these bank bulls may be too early, and/or wrong. The chart is similar to the $TNX to no surprise, the only adjustment is the change due to the 2-year yield. The same sideways channel is in play. Note that the spread now matches the August high. Back then Keystone highlighted this very same scenario with the 2-10 spread, at 255, and it dropped due to the negative divergence. The red lines continue to show negative divergence; the move higher now matches the prior high but the indicators are all lagging showing a lack of oomph. Over the last few days, note the jump higher in spread to 252 but stochastics and the histogram are firmly negatively diverged. The spread is also at the top standard deviation band so a move back down to 233-ish, at a minimum, would be expected moving forward. This would take the 10-year yield down to 2.50%-ish which is the H&S target described in prior charts.

The spread was increasing with a strong upward trend as the ADX shows during June-August but not anymore. Projection is for the spread to perhaps tease 255 but should roll over to the downside moving forward. Therefore, the longs running into banks and financials full force right now will likely be disappointed as the yield curve stops steepening short of the 255 needed to signal happy times ahead. The XLF financials ETF weekly and daily charts are universally negatively diverged across all indicators so it would be prudent to exit the bank's back door as everyone else runs inside. Without a 255+ spread, the banks got nothing. It will be interesting to watch over the next couple weeks. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

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