That indicator is the U.S. 10-year Treasury—the instrument of choice among hedge fund mangers when stocks become vulnerable to that big drop—that long-awaited second shoe thud of the global financial crisis. Get my next ALERT 100% FREE
A crash through important support at 1.8 percent on the 10-year note will most likely give the green light to traders to panic out of stocks and to rush into the next leg of the ride to the very top of the 30-year bond market bull market—which now has reached bubble territory. Gold will most likely sell off, as banks shore-up capital reserves and hedge funds make client redemptions during an equity market sell off.
“If we see the yield on the U.S. 10-Year Note break below the 1.8 percent level, what it’s to signal to bond traders around the world is that we have a deflationary wave coming,” trader Dan Norcini of JSMineset.com told King World News, Friday.
As far back as September 2011, 1.8 percent has been the rate at which traders have sold bonds and bought back stocks in anticipation of a ‘Bernanke put’, the widely-held belief that the Fed will come to the rescue of the markets in one way or another to prevent another first-quarter 2009 market crash, which took the S&P500 down to 666 in a harrowing scare reminiscent of the Crash of 1987.
After calling the March 2009 market bottom—to the day—two years later, in March 2011, Marc Faber, the editor of the Gloom Boom Doom Report, told CNBC’s Joe Kernen that the Fed won’t allow stocks (the only asset class it can ‘manage’) to tumble. The Fed will intervene, according to the Swiss-born economist and money manager who now lives in Chiang Mai, Thailand.
“We are in a mild recovery; markets are a discounting mechanism,” Faber explained in the March 2011 interview with CNBC. “And we have already doubled in the S&P from the low. So on the improvement, maybe the market sells off.”
Kernen asked, “You figure QE2 . . . they’ll pretend that they’re going to end in June, but then eventually they’re forced to start it up again. . . . QE8?”
“I made a mistake; I meant to say, QE18,” Faber quipped.
“So it will be here in 2012, as well, and maybe in 2013?” Kernan asked.
“For sure. For sure,” Faber maintained. “Until very recently, the Fed has had very few critics. . . Over the past few months a lot of critical comments have come up about the Fed and its money printing habits. But I bet you, the S&P drops 20 percent, all the critics will be silenced, and they will applaud new money printing.”
Back to Norcini: JSMineSet’s Norcini agrees with Faber’s assessment. The bond market is telling investors the stock market is vulnerable to a big decline as the S&P approaches the 1,325 level—a level that Charles Nenner of Nenner Research suggested on Financial Sense Newshour is the target for either a rebound in stocks or a further slide into a dangerous negative feedback loop of selling below 1,325.
“I think the reason the 1.8% level has been a floor so far is because most traders are convinced the Bernanke-led Fed will not allow deflation to occur,” Norcini continued.
If 10-year note rates decisively break below 1.8 percent, the next stop might be as low as 1.15 percent, according to Portola Group Founder Robert Fitzwilson, who said in an interview with KWN two days earlier of the Norcini interview, that a drop in the 10-year to 1.15 percent can only mean a market meltdown of an unprecedented proportion.
“The Fed can’t let this happen,” Norcini continued, citing Fitzwilson earlier comments about the 10-year Treasury. “What alternative do they have? I’m not a fan of central banking, but what are they going to do? Do they just let this deflationary tsunami engulf the planet? This is the Great Depression II that Bernanke fears and he will not let this happen.
“The bottom line is Bernanke may not want to do another round of QE, due to the political implications, but the market may force his hand if stocks and interest rates really begin to plummet.”
As of Monday, the U.S. 10-year Treasury trades at 1.77 percent, six basis points from its all-time low yield of 1.71 percent set on Sept. 22, 2011.
Related: Direxion Daily Small Cap Bear 3X Shares ETF (NYSEARCA:TZA), ProShares UltraShort S&P500 ETF (NYSEARCA:SDS), SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), S&P 500 Index (INDEXSP:.INX).
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