Seaport's Doolittle: Looming Treasury 'Death Cross' Predicts Market Selloff

Friday, 17 May 2013 08:15 AM

By Michael Kling

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The 10-year Treasury is approaching a "death cross" that points to a selloff across different assets, according to the Seaport Group, an independent investment banker.

In the so-called death cross, the 50-day moving average of the Treasury yield crosses below the 200-day moving average. If the event occurs, the yield would drop below 1 percent, and value of stocks, corporate bonds as well as commodities will plunge in a huge selloff, Abigail Doolittle, a technical analyst at Seaport Group, warns in a report to clients, according to CNBC.

"Such a potential outcome would not be surprising to us considering that it fits our thesis for a serious correction in equities, commodities and corporate bonds and one that is likely to be increasingly severe the longer that some of these risk assets rally at or near record highs," she wrote

Video:
Economist Predicts 'Unthinkable' for 2013

Doolittle, according to CNBC, cited four earlier times when death crosses presaged sharp drops in Treasury yields.

After the September 2007 death cross, yields dropped from 4.62 percent to 3.3 percent in seven months. In September 2008, yields went from 3.87 percent to 2.05 percent in four months. In June 2010, they went from 3.3 percent to2.38 percent. In June 2012, they dropped from 3.16 percent to 1.38 percent.

"This bearish technical aspect may mark the beginning of a move down below 1 percent and a possibility that is consistent with our work for more than a year now," Doolittle stated, according to CNBC. "It should be noted, however, that the 10-year yield may trade up toward 2 percent before starting this possible decline."

A death cross 10-year Treasury is a strong signal that the "historic running of the bulls in Treasurys will continue ... as investors seek safe-haven assets and flee risk assets," she said.

Fundamental analysts doubt technical analysts' signs. In fact, some experts sometimes see death crosses as a contrarian sign to buy.

Treasury yields dropped this week in response to increasing jobless claims, according to Bloomberg. Initial jobless claims increased to 360,000 for the week ended May 11, exceeding expectations.

"The higher claims is probably the most disturbing news,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group, told Bloomberg. "Core inflation being so low means it may be difficult to think there will be inflation pressures. The Fed is justified in continuing its asset-purchase program and easy monetary policy."

Video: Economist Predicts 'Unthinkable' for 2013

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