The 2-year/10-year yield ratio and the McClellan data are market "tells" for bearishness

There was a good reminder this morning from Rick Santelli and Jack Farujian talking on CNBC about watching the 2-year to 10-year Treasuries ratio, both for bonds and to see whether real confidence is coming back into equities; so here's a chart of it. The ratio of the rates on these 2-year and 10-year notes fell along with the equity markets into early 2008, rallied, and then dropped again as Treasury notes and bonds rallied to peaks in late 2008. After a sharp move up, the ratio actually declined some more into early this month. Another very sharp move last week saw it challenge its declining 200-day moving average, but then it faltered down somewhat again. The demand for the shorter-term maturity has driven down its yield compared with the greater uncertainty about the longer-term maturity, even as the rates generally increased this year. One idea is that a sustained rally in this ratio should be supportive for equities markets, as a "tell" that participants really are more willing to accept higher risk. For now - the continued drop this year as 10-year note yields rose, hasn't seemed so much that buyers are really willing to accept more risk, but that they haven't been thrilled with the risks of Treasury bonds and notes and therefore bid them both down in price - especially those longer-dated maturities! When participants would not only prefer avoiding long-dated notes and bonds, but also prefer to move from short-dated maturities into equities, that would be a greater sign of confidence in the equities markets.

Another uh-oh to keep an eye on - I had promised that I would post the McClellan charts here again when the Oscillator moved below the contracting "triangle" I'd been marking with trendlines. Sure happened fast so I'm posting the charts here again today (courtesy of DecisionPoint.com). Except, what I added today is another view of the lower trendline that shows a shallower slope that has not been broken. Also, when you look at the Nasdaq version rather than the NYSE version (both are below), you'll see that even the narrower contracting "triangle" was just touched down to by the Oscillator. In both, I think we need to allow for the possibility that the Oscillator can find support at that shallower, lower uptrend line; whether or not it would be great support or last very long. I'm thinking that if we see a break under that shallower line, that would help confirm that we're going into "primary C" in the OEW count for equities, rather than a "major b" pullback.

Going along with these thoughts, notice two additional points about these McClellan charts. One is that the Summation Index hasn't seriously fallen over, and of course remains above the zero line. The other is that the index ratio (bottom indicator) is just now touching down to its zero line. We'll have to see whether there's some support, or whether both of these turn more bearish in a way that's consistent with the more immediately bearish point of view.