Warning Signs

"In four hours, she's gonna blow, Captain."

---- Mr. Scott, from The Savage Curtain (Episode 77)

I walked by the Merrill Lynch office today, and there was a broker standing on the sidewalk handing out pieces of paper. I took one and saw that it was a 10-year Treasury note. They were giving them away today!

Apparently, no one wants bonds any more, and on Tuesday they continued their free fall. The 10-year Treasury yield surged to 5.25%, and is finally back to where Bernanke left rates a year ago.

Stocks were not happy about this, and found themselves hopelessly dominated by the whims of bond traders. Moving in inversion to yields, the NASDAQ reversed direction twice on a whopping 29% surge in volume.

The intraday chart below shows that when bond yields zigged (blue), the NASDAQ zagged (black). This whipsaw action is fun for day-traders, but to everyone else it felt like a bear-trap followed by a bull-trap.







Not that anyone's counting any more, but Tuesday also marked the 7th distribution day in the past six weeks. As a result, market internals were awful yet again, and the deteriorating charts are worth a look at tonight. All ten sectors closed lower on Tuesday as the weakness was widespread.

However, in a very bizarre twist, as Rome burns, leading stocks continue to play on. The IBD100 fell 1.4% -- the same as the RUT -- but on selling pressure that was light for the third straight day. While the declines were real and breadth was terrible, just 16 stocks printed distribution days. Institutional investors continue to hang on to the market leadership.

This is very odd, and on the whole, the IBD100 continues to look OK. In May 2006, the IBD100 was a portrait of misery, and tonight it looks nothing like that. In fact, it's acting like it did in February. February saw a violent move in the broad markets, but the IBD100 held steady. The February correction turned out to be very brief, and it will be interesting what the current IBD100 strength might mean this time. Of course, for it to mean anything, the strength has to last.

The IBD100 may look OK, but the NASDAQ certainly doesn't. On Tuesday, it parked itself exactly on the 3-month price channel. A break below 2535, and the odds say that it's all over for a while.







If the chart below were a stock, some investors would be screaming "exhaustion gap!" and "short that pig!" However, as with any security, new highs tend to beget new highs, and yields are no different.

Bonds are caught in the grip of unwinding derivatives. Rationally, buyers "should" have stepped in by now and driven yields lower. However, the bond market is no longer rational and is acting very out-of-character. Large and mysterious financial instruments are being unwound, and for now, the fat bond beyatch has yet to sing. Maybe tomorrow she'll start warming up her pipes.







Brunhilde better get started, because -- as nastar pointed out -- the 5-10-20 Timer tags a Sell tomorrow unless stocks rally. One shred of bullish news is that tonight's candle is a loose, gravestone doji bullish. This is a reversal pattern , but it has low reliability, and it's been approached unconventionally. However, if bond buyers step in tomorrow, the 5-10-20 Timer just might dodge a bullet.








The market is obviously weak, but it's also given investors every conceivable chance to get out of the way. The current slide has been the worst-kept Wall Street secret in recent memory.

Tomorrow, investors see Retail Sales data and the Beige Book. In this environment, who knows how the market will react?

Until then, have a great evening.

best

dk