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Bond Market Comments

2/08/10 - 9:00 a.m. - The treasuries opened with a bang on Friday as the 10's printed 3.583 in front of the jobs numbers and then improved that to 3.567 immediately after the release but they quickly reversed and within 10 minutes were back at 3.645 and it looked as if the wall of resistance that had contained them so well already, had done so again. But that was before the stocks began taking it on the chin one more time, eventually printing 1044.50 SPX at 2:00, a full 60 points below where they had been on Tuesday and things looked bleak for the equity markets, helping to attract a bid back to the treasuries. By the time the stocks had made their lows, the 10's had broken through 3.55 in spades. Never mind that the equities somehow found their footing and managed to close higher on the day, the treasuries never lost their bid and with a close at 3.546, they have all but eliminated any bearish wave counts from current levels. A pull-back from here would not be out of the question but it should only be temporary as now, it appears that 3.10 is once again a viable target. There is one shallower target near 3.35 and some very solid resistance from 3.20 to 3.25, but until I see clues to the contrary, I will be expecting a test of the low 3% handle and most likely by next month at the latest. 

As far as equities go, they continue to look like they may still be closer to the highs than to whatever lows they may be headed to. For now, what looks like their best case scenario would be that Friday was the bottom of their first wave down. With such a good reversal following such a huge break, and with what looks to be a minor 5-wave advance off of the lows, we may have seen the bottom of either an A-wave or a 1st-wave. If so, then expect to see a recovery of anywhere from 1/3 to 2/3rd's of the break, but that should still lead to another decline similar to the first in virtually any wave-based scenario. The best alternative now would seem to have them just getting started in a 3rd or C-wave that could carry the SPX to at least 1025 before any significant rally would be likely. For now, the stocks seem to be vulnerable whether it be right away or after a corrective rally. 

The currency traders didn't seem to have much trouble interpreting the data on Friday as they just continued to be buyers of the U.S. Dollar. The index completed its' 3rd consecutive strong day on Friday, closing near 80.50. There is a target area for this rally at about 81 which if it gets exceeded, could be the first sign that the lows made back in December might represent a real bottom and not just an intermediate low. 

On the news front, one subject that had been creeping into the news that past couple of sessions and was likely at least partially to blame for some of the losses incurred by the equity markets, was the subject of sovereign debt and specifically, the deterioration of it. Led by Greece, there are more and more countries whose debt may be in need of a downgrade or so go the reports with even our debt being mentioned as possibly unable to maintain its' current rating without some changes. This of course is not a new story but rather is one that just won't go away. Secondly, there is news today via the WSJ saying that the Fed will begin to 'lay out a blueprint for credit tightening that they can use once the economy has recovered sufficiently'. This is actually the kind of news that might have a more direct impact on stocks and bonds even though one would think that such a blueprint might have been in the works from the start. Regardless, these kinds of stories might keep a lid on any equity market rally and that of course could help to keep bonds well bid.

Thursday and Friday produced a rally in the 10's from a low tick of 117-16+ to a high of 118-30+. It also produced the best volume that market has seen since the 11/27 top at 120-15. Open interest has been on the rise and expanded to new contract highs on Friday. True the daily stochastics for the 10's jumped into overbought territory on Friday but that alone isn't enough to put pressure on a market. The weekly stochs are just below what could be called overbought but any fair analysis would still view both of those charts as suggesting that we would still see higher prices. For a while now, I have been saying that the preponderance of evidence seemed to be pointing towards higher prices with a wall of resistance standing in the way. Well, it still is but now, without all the resistance and that wave-based target at 3.57. A pullback in here is certainly possible but until I see evidence to the contrary, I will view any decline as just that - a pull-back - and expect to see still higher bond prices. 

 
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