First - if you think markets always move opposite to yields, please be open to learning something new. Covariance, in statistics, is the relationship between two random variables. This chart indicates periods of negative (blue) and positive (yellow) covariance between the 10 year yield and SPY. If you think about it, this makes sense because there are times when rising rates give investors more confidence in the economy. Traders can benefit from knowing the general relationship.
> Yields change in response to central bank activity - I cannot explain why the covariance flips
> Other factors influence markets but yield is reliable for intraday moves
> 1.77 has been key support for the yield recently, and hence for markets
> Above 1.83, markets get spooked and covariance becomes negative (you can see this in yellow boxes also)
> Below 1.74,1.73 should increase selling momentum
How am I using this information to plan trades?
> I believe yields will drop further and take markets lower, so I am looking for swing put trades
> This strong upward rally has brought indices and stocks to moving average and price resistance areas, which technically also indicate swing puts
> I have successfully day traded DIA and QQQ calls and puts using yield changes a guide
> I was too early in buying swing puts on 31 Jan, but since they expire 18Feb I can hold the loss for now
> As I finish writing this, yield moved up from 1.748 to 1.771 and markets have also been moving up - I see this as a good time to buy swing puts
> Yields change in response to central bank activity - I cannot explain why the covariance flips
> Other factors influence markets but yield is reliable for intraday moves
> 1.77 has been key support for the yield recently, and hence for markets
> Above 1.83, markets get spooked and covariance becomes negative (you can see this in yellow boxes also)
> Below 1.74,1.73 should increase selling momentum
How am I using this information to plan trades?
> I believe yields will drop further and take markets lower, so I am looking for swing put trades
> This strong upward rally has brought indices and stocks to moving average and price resistance areas, which technically also indicate swing puts
> I have successfully day traded DIA and QQQ calls and puts using yield changes a guide
> I was too early in buying swing puts on 31 Jan, but since they expire 18Feb I can hold the loss for now
> As I finish writing this, yield moved up from 1.748 to 1.771 and markets have also been moving up - I see this as a good time to buy swing puts
Komentar:
One correction - yields over 1.80, not 1.83, may give markets pause.
Komentar:
I forgot to draw an arrow indicating that markets will also go down if yield first rises over 1.8, and wow did it rise! Let's see what happens after Friday's employment report.
Komentar:
As stated, covariance becomes negative over 1.80-1.83 (speaking of recent activity). So with payrolls report spiking yields, will 10yr go over 2? This weekly chart shows ~1.95 as an upper limit before yields turn lower.
