The demand for Treasuries picked up a bit this month. But that bit wasn’t enough to send yields lower.
Part of the problem is that dealers have been mispositioned and have not been buying as many Treasuries as usual. A similar process occurred in 2008 when the dealers were positioned wrong. Their mispositioning either caused or exacerbated the financial crisis.
Foreigners have also cut back. As they converted dollars from their sales of Treasuries back to euros and other currencies, their central banks recycled those dollars back to the US. Despite that cash being recycled back into the Treasury market, yields still rose. Other investors were rotating out of bonds and into stocks.
Except for the early February crash, declining effective investment demand has yet to be felt in stock prices. As the Fed continues to drain funds from the system and demand is thereby weakened, we will see more downdrafts in stocks.
Watching the Treasury market, the 3% level on the 10 year yield is obviously critical. It may take a while to clear that level, but once it’s broken, the pressure on stocks should grow.
When I was working on Wall Street in 1983, I had two partners who did the trading while I did the analysis. They entered a futures trading contest. Using the Hurst cycle signals I had taught them they turned a $10,000 futures account into $990,000 in a month. They were on fire, and on the way to winning the contest. But then it happened.
They got sell signals one day and reversed their position with the goal of again compounding a massive futures profit into an even bigger fortune. The very next day, the sell signals reversed and went back to the buy side.
It was a quintessential whipsaw.
My buddies had a bit of a bearish bias and didn’t believe that signal, so they hunkered down and held their short position.
One week later their account was at zero. They got the margin call that wiped them out.
I learned an important lesson from that. I’m not smarter than the trading signals. They’re not always right, but they’re right more often than not. So… let’s let probability work in our favor.
In crazy markets like the ones we’ve seen over the past few weeks…don’t second guess signals. Don’t freeze in the headlights like a panicked deer.
Instead, here’s what to do.