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"Trump Trade" Correction Running into Resistance

Wednesday, March 29, 2017

Today's Spotlight Market

Looking at the most recent Commitment of Traders report we see that large speculators were busy reducing their net long positions in the E-mini S&P 500 futures. During the reporting period ending March 21, non-commercial traders reduced their overall net-long position by over 75,000 contracts. At the same time, this category of traders reduced their net-short position in 10-year note futures by a whopping 129,000 contracts. This scenario seems to support the notion that an unwinding of the so called "Trump Trade" was occurring.

Fundamentals

The rally in the Treasury Bond futures that began in mid-March is starting to run into some headwinds, being influenced by what appears to be a near-term low for U.S. equities as well as some supportive economic data. On Monday, we saw U.S. equities stage a modest reversal, with the E-mini S&P 500 closing well off of the session lows after trading at price levels not seen since early February. The initial selling in equities and, in turn, a rally in Bond futures on Monday occurred in the aftermath of a failure to bring to a vote a new healthcare bill in the U.S. House of Representatives. While there was no certainty that even passage of the bill in the House would survive debate in the Senate, it was the market's concern that other more "market friendly" parts of President Trump's agenda, such as a tax code overhaul and other fiscal stimulus measures, would be more difficult to implement in a divided Congress that sparked selling in equities and a rally in Bond prices. On Tuesday, a surprisingly strong reading in the consumer sentiment index, which rose to 125.6 from 116.1 in February, kept the trading momentum favoring equities over Bonds on Tuesday, although the data did not account for the lack of action concerning health care reform. So while it is still too early to say that the recent unwinding of the so called "Trump trade" being long equities and short bonds is over, it does appear any further correction of this widely held trade may find some resistance in the near-term.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice the recent short-term rally in prices has run into some resistance just short of the most recent high of 153-12. In fact, prices only rallied as high as 152-03 on Monday prior to a nearly full point drop on Tuesday. It does appear that there is some significant resistance on the daily chart at price levels from 153-12 to about 155-14 for the front month futures, which may be difficult to overcome in the short-term. While prices are currently above the 20-day moving average (MA), the long-term 200-day MA is still well above current price levels just north of 160-00. Momentum as measured by the 14-day RSI has started to weaken from the recent high reading and is now poised at a more neutral reading of 54.87 as of this writing. Monday's high of 152-03 looks to be the next resistance level for the June Treasury Bond futures, with chart support found at March 14 low of 145-26.

Mike Zarembski, Senior Commodity Analyst