Treasury yields have not hit bottom

November 21, 2016 09:00 AM
Cycle Projection Oscillator: Rocket science meets markets

The Cycle Projection Oscillator (CPO) is a technical tool that uses complex algorithms to filter multiple cycles from historical data, combines them and gives a graphical representation of their productive behavior. The CPO methodology employs proprietary statistical techniques to obtain cyclical information from price data. Other proprietary frequency domain techniques then are employed to obtain the cycles embedded in the price.

10-Year Yield

With the market nearly resigned to the long awaited second interest rate increase at the Federal Reserve’s December Open Market Committee meeting, one might expect long-term yield to eventually rise and perhaps reverse a 35-year bill market in bonds. However, the CPO is indicating that 10-year yields are a touch overbought and will drop substantially into the first quarter. The CPO is indicating that long-term yields will drop precipitously, likely setting a new all-time low in March before rebounding. 

S&P 500 

For months the CPO has been expecting a sharp decline in the major stock indexes. Initially this was targeted for September, which did see a sharp one-week decline, which after a quick rebound begged the question: Is this all there is to it? More recent CPO readings answer with a resounding no. The CPO shows the S&P 500 entering a more pronounced downturn that will carry on until the end of the year. How bad will it get? It is not clear but the CPO indicates that it could test the correction lows of August 2015 and January 2016. 

Euro FX

The euro has held its own since the Brexit vote, but more selling could be ahead for the Eurozone currency. The CPO is predicting a sharp sell-off in the euro through November and December that should set new 2016 lows. The downturn, however, is not expected to last into 2017 as the CPO is showing a rebound to higher levels, before once again showing weakness in the second quarter of 2017. However you look at it, more volatility appears to be in the cards.

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at johnrawlins@msn.com. @cpopro1. You can reach John at johnrawlins@msn.com.