That's what this chart is - it's GREEN, and for a someone short selling US Equities into it, it's a MONSTER...
Most economists and strategists will have a very hard time convincing me or, more importantly, Mr. Market, that a steepening yield curve isn't a very bullish signal for Equities. Below (see chart) we express this steepening by showing the spread between 10 and 2-year US Treasuries.
One of the main reasons why I was running 70-96% cash levels in my Asset Allocation Model in September/October of 2008 was that this spread was compressing. In both December and March/April, you have seen me drop my average position in US Cash down to the 45-65% range, primarily because, on the margin, I have seen this relationship for what it is - a bullish leading indicator.
The best question you can ask me from here is why can't this curve begin to flatten again? It definitely could, and I'd argue that a compression of this spread + the strengthening of the US Dollar, were the two governing factors behind the US stock market selloff that we saw in February. The problem with that pattern (for the Depressionistas at least) is that it has not repeated itself here in April.
So the point is, beware of the Green Monster - because it can inflict pain on both bulls and bears, depending on its directional move. This morning, despite the manic media's Swine Stress, the yield curve was steepening further. It is now +203 basis points wide, and US Equities have moved to green on the day.
Keith R. McCullough
Chief Executive Officer