Divergence With Bonds Hints at Potential Decline for Stocks

investing.com:

Stocks were up yesterday by around 1.1% on the S&P 500, but we have gone nowhere now in a week, so the bulls are making no progress. The question in front of us is which way the index will break, and for the past several weeks, we have been able to rely on bonds to give us that answer.

However, yesterday was strange as stocks broke from bonds and rallied despite lower bond prices. At least since mid-August, there haven’t been many times when bonds and stocks went separate ways, but yesterday was surely one of them.

From what I can tell, we have seen this happen a few times, on September 10, September 14, and September 19. Each time, the S&P 500 was lower in the following days because bond prices kept falling. If bond prices keep falling, I think the S&P 500 will find itself lower, too.

At least for yesterday, it was all about the VIX crush and the weaker dollar. That is what I think propelled stocks higher and caused the divergence. Once the VIX declines slowed, the S&P 500 rally ran out of gas.

Additionally, the big gamma level for this week’s OPEX is 4,400, which will cap any further upside unless that level moves higher today or in the days ahead. Based on the options activity for Friday and what I saw, I don’t think we will likely see the 4,400 level change today.

Source: Bloomberg

The five-minute chart yesterday has a very symmetrical manufactured-looking shape, and unless the index gaps over 4,385 today, which was high for yesterday, then I would think the day’s gains are given back in the days to come this week, if not today.

The 10-year moved higher yesterday but wasn’t able to get past. 4.73% yet. Rates have been consolidating again since the job report. A bull flag may have formed in the 10-year, but until it