On the Lookout for a Bond Market Top

As the Dow Industrials challenge the 17,000 level, the debate on Wall Street continues as those who have been caught on the wrong side of this market try to rescue their portfolios before the end of the quarter. Some argue that the low VIX readings are warning of too much complacency while others argue that it is a bullish sign that means the market can move even higher.

The German Dax also made a new all-time high in Monday's session and it has added to these gains in early trading Tuesday. The regional banks were one of the star performers as the SPDR S&P Regional Banking ETF (KRE) was up 1.55%. On the downside, the REITs had a rough day with the retail and residential REITs losing almost 1.5%.

There were technical signs that the REITs were vulnerable in last month's Yield Chasers Watch Out, so the drop was not surprising. Overall, the first five months have been tough for bond traders as the market was one sided as the year started.

The stock index futures are a bit lower in early trading and the major averages are overextended on a short-term basis. The NYSE Composite did exceed its monthly projected pivot resistance at 10,920 in Monday's session. A pullback would improve the technical outlook and could take some of the materials stocks I recently recommended into my buying zones.

The heavy short position in the bond market early in the year meant the market was quite one sided and again those that followed the crowd ended up losing. It seems like the sharp rise in bond prices and drop in yields two weeks ago may have cleaned out even the most stubborn bears. According to Bloomberg, the short position of hedge funds and large speculators has dropped from over 162,000 contracts in April to just over 43,000 in early June.

Here are some technical reasons why bonds may be topping and yields may have already made their lows.

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Chart Analysis: The daily chart of the continuous futures contract of the 10-year T-note contract had a high of 126 on May 29 before closing at 125 20/32.