Tbondtrader

Previous Commentaries

Back Home

6/30/09 - 9:00 a.m. - The markets are backing away from some very powerful resistance levels and it is now likely that we have seen the best levels we will see prior to the jobs data set for early release on Thursday. Following a relatively low volume day on Friday, the markets experienced another one yesterday which raises the question, is the volume poor due to the upcoming holiday, or is it poor due to deteriorating interest in the markets at these levels? One would have to think the low volume numbers are holiday related but when markets rally and volume goes down, it can be one of the most important technical indications of a pending reversal of trend that you can find. To complicate that analysis, the markets will have to deal with the early release of the BLS data later this week and while that should bring back volume, it remains to be seen in which direction. Ending the week on a down note and with good volume will tax the charts technically heading into next week and given that currently, we have faltered at some very powerful upside targets, how we come away from this area can prove critical. I still view the intermediate-term picture as constructive based on numerous technical factors but the most important thing any technician can do is recognize when he or she is wrong and next week, if not as early as Thursday following the economic news release, we may very well find out just how constructive things really are.

Having now experienced such a hard break from the highs established yesterday, let's take a look at where the various markets have stalled/failed. Basis the 10-year futures, yesterday's highs of 116-23 were just 2 ticks above the 50% retracement of the decline from 5/14 which could prove to be just the 3rd wave of the larger third wave that had begun back in March. You don't need to do wave work or use Fibonacci numbers to know that a 50% retracement is important. The high was also about 5 ticks above the wave equality target where the rally from 6/19 would have equaled the rally from the 6/11 bottom. The cash 10's traded at 3.456, just 2 bps from the 38% retracement of the entire move from March 18th and only 1 bp from the 62% retracement target of the move from 5/14. Additionally, the low yield was just over 1 bp from a trend-line drawn from the March 18th yield trough and was a near direct hit of its' wave equality target from 6/11. The cash 30's traded 2 bps through their 38% retracement of the entire move from 3/18 as well as about 3 bps through a trend-line drawn off the extreme yield trough back in December before turning down and finally, the 30-year futures traded slightly through their 38% retracement target from March while nailing their wave equality target from 6/11. I know that's a lot of numbers and info to digest but just let it all serve to point out that we have rallied fairly hard and reached some compelling levels at which a bear should want to be a seller and done so with decreasing volume, and now we have backed away rather precipitously and already, we are seeing more early volume that what we have seen for the 2 previous days.

The bottom line here is that the markets are doing just about what one might have suspected they would given the great deal of resistance and small amount of support that was evident yesterday morning. Elliott patterns won't be of much help here either since, as I pointed out last week, the larger rally I was expecting to see was a corrective one and therefore can have the same structure as would a minor, 2-week correction. At the very best, we will now need to get past Thursday to have any good sense for what is likely to transpire next week and beyond. Once, or shall I say if, we clearly overcome the resistance that has held us back so far, we should be on the way to something closer to 3.25 in the 10's, but below 115-20, and we may then test the only good support visible near 115-00 and that area must hold to avoid an apparent test of the bottom in the 113's - or possibly the development of a triangle which, while lasting for another several weeks, would not produce any further new highs. It's is now a game of wait and see.

6/29/09 - 9:00 a.m. - In Friday's update, I tried to bring your attention to the fact that at least from my perspective, the resistance above us is very compelling both with regards to the strength and overall amount and at the same time, I see very little good support for more than a point in the 10's and well over 2 in the 30's. That alone creates a treacherous environment for positioning. It becomes especially difficult since I like the markets going forward so while the long side seems like the correct side to me, the path higher looks to be a risky one - at least for now. With a combination of month and even quarter ending transactions this week to go along with a jobs report and an upcoming holiday, the markets are also likely to trade thinly at times and while the momentum seems to be up, and even no news may be received as good news, market unfriendly surprises are likely to take a large toll. Probably more than usual, money management and good stops will be key to success for the week.

During much of the 3-month long sell-off in treasuries, stories surfaced suggesting that foreign central banks might be losing their appetite for our debt but last weeks' auction results seem to put those fears to bed. Indirect bids for the 2, 5 and 7-year treasuries auctioned off last week - those bids that include foreign central banks - were the strongest in anywhere from 6-10 years, with the best numbers coming from the auction of for the longer dated 7-year notes. That undoubtedly contributed in a big way to the rally. With the massive amounts of debt being issued, maintaining foreign demand will be imperative to keeping rates down.

I read a story on Bloomberg this morning that reflects the results of a survey taken with regards to 10-year yield forecasts going forward. The survey polled the 16 Primary Dealers and the average 'guesstimate' for 10-year yields for year-end was 3.58. At first glance one would have to wonder what they were thinking since so far this year the 10's have gone from just over 2% to just over 4%, much of that having occurred in just the past 90 days. So now, after all of that volatility, we're supposed to believe that the next 6 months will see rates remain basically unchanged? Well, a closer look at the survey results reveals that the range of estimates runs from 2.75 to 4.30. Now that's more like it. The average may suggest that everyone is good with rates where they are but the true picture is one of extreme uncertainty. A second survey was taken of around 70 strategists and economists and their 'average' forecast was a tad higher at 3.74. The most interesting aspect of that survey seemed to come from the fact that the contributor who had made the most accurate forecast in January, has now forecasted the 10's to be at 4.50 by year end. Our preferred wave count doesn't give us a target for year end but it does suggest that by the end of the summer, rates will be headed higher through year end.

When you stand back and view a chart of 10-year yields since December, it's interesting to see just what they have done. If you were to use a 5 basis point margin of error, meaning give or take 5 bps at each extreme, they have gone from 2% to 3%, corrected to 2 1/2% and then gone to 4%. If they were to now correct 50% of the yield rally from March 18th, yields would be just under 3 1/2%. That pretty well fits the pattern.

If we had no bias at all going forward and viewed the markets to still be in down-trend, an assumption not hard to support, then the first place we might look to sell would be where the second rally from 6/19, equaled the first rally from 6/11. That would be at 116-18+ in futures and 3.449 in cash. The futures have slightly exceeded their number, the cash so far has fallen just short. There is also a trend-line on the cash chart drawn from the 3/18 yield trough that also crosses at 3.44 today so that level can be huge. The next target would likely be the 38% retracement of the rally from March which in cash comes in at 3.424 in cash and 117-06+ in futures. The point here being the same point we brought up at the beginning of this report and on Friday as well. There is great resistance in this area which needs to be respected. Overcoming any of it drains energy from the markets and they need all the energy they can get to overcome all of it. I suspect they will - but not all at once. Backing and filling is an important part of any rally and is to be expected. If we can make it through the week without a hard break and get good numbers from the BLS on Friday, then anything is possible but for now, I would be selling into resistance and tightening up stops whenever possible.

6/26/09 - 9:00 a.m. - For the first half of yesterday it seemed like the fixed income markets couldn't get out of their own way but that all changed around 1:00 and in the next hour the 10's rallied a full point, finishing with an outside up day. Charts of the long end now reflect apparent head and shoulder bottoms supported by an island reversal and without the FOMC meeting hanging over them, it seems that suddenly investors can't find enough bonds. And yesterday, the fact that stocks were rallying didn't seem to discourage bond traders either so it is fair to assume that sentiment has changed in a big way. So does this mean we can expect to see rates come down similar to how they went up following the now infamous March meeting? Well, probably not for a variety of reasons but I still do expect to see a general improvement well into the summer with objectives that I'll touch on shortly.

The first thing that strikes me at current levels comes from my support and resistance analysis which shows a great deal of strong resistance in nearly every market I monitor. In my opinion, nearly every resistance area above is at least of intermediate strength, most having come from significant Fibonacci retracement targets, wave equality targets and seemingly important trend-lines. The markets are so oversold on a weekly basis that anything seems possible on the upside but with so many significant levels showing up in various charts, clearing them all without hesitation just doesn't seem likely. Additionally, applying Elliott Wave theory to the structure of the first rally off the bottom, it appears to have more characteristics of a 3 than a 5, and if that is true, then the rally that has begun will take the form of either a 'flat correction' or a 'triangle. In either of those patterns, the rallies will be choppy, at least through the first 2 phases which should occupy the first month or more. The good news is that in both cases, we could see the best levels we are going to see in this first phase, the A-wave, but still the path to those highs will be filled with potholes. Should those short-term charts that suggest a 3-wave rally off the bottom prove incorrect, then the rally will be much more orderly but I'll address that possibility is patterns warrant it. And while on the subject of support and resistance, a glance at the key levels also reveals that my work shows nothing more than minor support for more than a point in the 10's and while there is no need to trade down to the better supports, that still leaves the markets vulnerable to negative surprises.

With what now appears to be a low in place, we can begin to focus on some objectives for what I feel will be perhaps a 2-month corrective rally. Basis the 10's, the first and in many respects, the least likely to actually stop us, will be near 3.44/3.42. Clearing that area should open the door to a move to the low 3.20's which in many respects would have to be considered the 'preferred' target. And finally, on an extreme, there is a retracement target at 3.056 while remarkably, wave theory has for a line in the sand if this is truly a correction, 3.054.

Today will almost certainly mark the 3rd consecutive higher weekly close in 10's, the first time that will have happened since the week of March 18th so that, too, will suggest better days lie ahead. I suspect, however, that any further improvement from here will be more incremental than what was seen yesterday, at least until we can do some backing and filling. While it is difficult to determine exactly which of the many intermediate resistance numbers will turn us down, I do anticipate a break by early next week that should help build a base for an even bigger rally to come.

6/25/09 - 9:00 a.m. - I'd have to say I'm a bit disappointed in the price action since the 2:15 release yesterday but not all that surprised. The old adage of 'buy the rumor and sell the fact' is all about these sorts of moves when a market makes a strong statement in front of important news only to fade it once the news comes out. I'll always be looking for market direction clues based on wave theory but as I pointed out yesterday, the rally from the lows does not appear to be impulsive and while that alone does not disrupt my belief that we are likely correcting the entire move that began on March 18th, if this pattern persists, it will only go to make the move more difficult to read. Frequently a corrective rally will still take the form of 2, 5-wave advances but for now, this one does not have that look and that is unfortunate. The more traditional indicators continue to support the notion for a rally as weekly stochastic oscillators are stubbornly oversold and set up beautifully to support a nice rally while the dailies are admittedly getting a little too high for comfort as are the longer-term intra-days. Additionally, since the release yesterday, we have pulled back sharply from the highs and have drifted sideways since, suggesting from a short-term wave perspective, that a secondary pull-back should develop. This all seems to point to a possible consolidation for a few days before the next push up - assuming of course that there will be one.

While the entire move off the bottom shows no signs of being impulsive, the secondary rally from the lows on the 19th offers up some intriguing price levels to watch. The upside gap left on Monday morning runs from 114-26+ to 114-17 while the 38% and 50% retracements of that move are at 114-27 and 114-17+. Such a situation is unusual and underscores the importance of both ends of the gap. Not holding the 114-17 area would suggest a move to the upper 113's where I would want to see a reversal from above 113-27 otherwise I would be pretty defensive unless and until the market made a more positive statement.

And speaking of statements, the Fed's statement yesterday offered the same support for the markets as had the previous one released in late April. They stated no intentions to change their posture with regards to Fed Funds or the purchase of long-dated treasuries and Agencies/Mbs. In fact, the side-by-side picture of this release vs the last makes it clear that 'cut and paste' was one of the primary tools they used to construct the release; something which is not all that unusual. They repeated their belief that inflation was not an issue at this time and continued to remind us all that a recovery in the jobs market should not be expected too soon. So in summary, the entire report was pretty much a non-event.

This morning's GDP report offered no real surprises either while the Jobless Claims were somewhat worse than anticipated but no real buying has entered the market as of yet. If we were to weaken from here, then tomorrow could prove to be key since not only does the entire area of the gap appear to be important technically, but just below the bottom of the gap, at 114-14, we have last week's close and if we can manage to stay above there through tomorrow, it would mark the first time that we have had 3 consecutive higher weekly closes since March 20th and for the record, we haven't had 4 consecutive higher weekly closes since the top of the market last December but that is a matter I hope to be dealing with next week.

I still think stocks are important but not unlike bonds, they need to move away from current levels to prove anything at all. Below 875 can be trouble while above 912, things will begin to look a little better.

Risk/reward in here is difficult as the only stop that makes any sense is one that is placed below 114-17 while the first sign that we are legging back up will not occur until we trade above 115-18 and even then, the resistance is still substantial at 115-22/25. I remain optimistic but now, I am awaiting some sort of confirmation that we are ready to rally again and it just isn't there yet.

6/24/09 - 9:00 a.m. - Today should be all about the FOMC meeting but in all honesty, the markets have made a fairly loud technical statement over the past 2 days and right now, an unfriendly reaction to this afternoon's announcement would have to be considered a surprise. On Monday, the markets gapped up, filled the resistance gaps left the previous week and closed on the highs of the day. Yesterday they opened weaker but the 10's held at precisely the top of the gap left the day before and then extended the rally considerably. Additionally, 10-year yields managed to close below a 21-day moving average on Monday for the first time since the beginning of April and then yesterday, they backed up to touch the average and rallied once again. That 21-day moving average had been tested no less than 10 times since April 2nd without ever having been broken on a closing basis until Monday. The charts also now have developed what can be interpreted as a 'head and shoulders' top on the yield charts and while not respecting the 2:15 announcement for what we all know that it can do would be a mistake, given that now the charts have support gaps, a 2-day island reversal below, a close on the positive side of a significant moving average and potential 'head and shoulder' yield troughs, it is fair to say that we have developed a strong foundation for a rally from very good timing for a bottom. The one thing that had given me cause for concern through Friday, the lack of a clear impulse wave off the bottom, remains but given my preferred wave count for the bigger picture, a 4th wave corrective rally in the making, Elliott does not require a 5-wave advance from this low. It would have been nice and it would have made it easier to anticipate upside prior to Monday afternoon, but now is isn't all that disturbing.

Today's announcement can be expected to clear the air with regards to several important issues. For one, following the better than anticipated Jobs report of a few weeks ago, the fed fund futures markets priced in a tightening by the Fed for later this year and while those markets have since recaptured much of the ground lost after that news, that is still an area of contention that their statement can clear up today. Additionally, while they still have money allotted for the purchase of treasuries and mbs, their efforts so far have failed to put a lid on rates and many expect them to address that with regards to possibly becoming more aggressive either with regards to Treasuries or mortgage backs - or both. And like what happened in March, they could say or do something that is more creative than what the masses are expecting and that could result in a big increase in volatility.

One last market to address is the stock market which, since 6/11, has developed a clear wave pattern from the top; that being a 5-wave decline followed by a corrective rally and a second impulsive looking decline. The SPX has now gone from 956 to 890 in 8 days and the area below, near 875, looks to be crucial. Stocks and bond have been mirror opposites of one another since March and if the SPX were to break below 875, that could be taken as additional evidence that bonds are going to rally further.

For now, I believe that we have begun a rally that should last somewhere in the neighborhood of 6 weeks and cover something like 75 bps. Those are rough estimates but now, absent what would have to be considered a surprise move by the Fed, it appears that we have entered an improving market environment for bonds. 

6/23/09 - 9:00 a.m. - Yesterday produced some surprisingly strong technical developments even if at the end of the day, the 10's had only barely made it to our 'sell area' posted in the 'Key Levels' sent out early. For starters, upside gaps that had been left on 6/18 were filled and while the markets failed to improve beyond the tops of the gaps, they also failed to back up and closed very near the highs for the day. They had begun the day with a gap to the upside and the opening remained the low of the day so the daily bar is quite constructive looking. The 30-year, by virtue of having gapped over the same price area as it had gapped below on the 18th, built a 2-day island reversal, that when viewed in relation to the market over the past several weeks, appears to be the right side of a potential 'head and shoulders' topping pattern on the yield charts. And finally, the cash 10-year managed to close through the 21-day moving average alluded to in yesterday's update, the first close through that average since yields were at 2.75. So following all of these positive developments, how did we open today? Softer of course. The FOMC meeting still hangs over the markets like an anvil and we may just be in a holding pattern now through tomorrow afternoon but absent a move back into Friday's range, those above mentioned positive developments are going nowhere and they should serve to add a positive tone to the charts as long as we don't get any unexpectedly bad news from the Fed; something they can ill afford to send us.

Several days ago, I suggested that the middle of the range was not a bad guess as to where we might be by tomorrow afternoon. By the close yesterday, that seemed unlikely, although now we have backed away from the area of last week's gap so it isn't out of the question. The most likely extreme below us now, however, becomes the high of Friday where we will fill the gap left yesterday morning. That would be at 114-17 in the 10's (3.742 cash). Oddly enough, the cash 30's are about the same distance away from their gap although the 30-year futures remain more than a point above their equivalent. The point is that the mid-point we were looking for last week at 114-09+ in the 10's, seems unlikely now as there is plenty of support to overcome before we can get there. And to fill the gap, we of course first have to enter it, which occurs at 114-26+ (3.772). Holding the tops of the gaps would be all the more friendly. For now, I will lean in the direction that suggests that the lows are in and we have only to get past the 2:15 release tomorrow to extend the rally.

While it was disappointing that the wave pattern from the bottom on the 11th showed no clear sign that we were impulsing up, my preferred count at this point is that we are likely heading into a 4th wave correction of the move from March and the key word in that sentence is 'correction'. There is no need for the rally to begin with a 5-wave structure; it would only have served to help to be more constructive heading into this week. By next week, the best of the timing will be behind us and hopefully, so too will be the lows.

The only other thing worth mentioning is the stock market which is finally coming under enough selling pressure to gain attention. The first leg of the decline from 6/11 at 956 SPX to 6/17 at 903, appears to be a clear 5-wave decline and that assessment was only enhanced by the corrective look of the rally into the 19th that stalled at the first and best wave-based target of 928; the actual high was 927. From there we made new lows in what appears to be a second impulse down. Best targets seem to be near the May lows of 879 down to 875 where this second wave down will equal the first. Beyond there and the best wave count may well be one that targets the March bottom. While that may be getting a little ahead of ourselves, the main thing to keep in mind is that the area of 875 can be crucial to the longer-term health of that market and don't forget, since March, stocks and bonds have moved in lock-step but as a mirror image of one another. Should stocks actually test those lows from March, it would seem that the 10's could do better than 3.05 and that is the point at which my current '4th wave correction' count for the 10's breaks down, so while these 2 scenarios may not be perfectly consistent with one another longer-term, for the immediate term they are and we can deal with the longer-term as the charts dictate.

6/22/09 - 9:00 a.m. - At Friday's lows, the 10's had given back nearly 75% of the rally that began 2 Friday's ago and by early this morning, they had recovered nearly 70% of the ground lost since the highs on Wednesday. I had figured an improving market heading into Wednesday with targets near the middle of the recent range (114-09+ in the 10's) was likely but now, the middle of the range is well below us and with the pattern not very convincing one way or the other, perhaps now a general weakening from this early burst is not a bad guess. The truth is that trying to forecast the markets in here flies in the face of good money management and that will be the case through the FOMC meeting. As far as forecasting goes, patterns could still be used to suggest a sizable break in either direction, although we do continue to view Thursday as the end of the timing window we have for a bottom and one that we have been in since just 1 day before the existing low. Even being at the end of the timing window, however, one just cannot forget the 50+ bps move that came immediately upon the release of the news from the FOMC meeting in March so we won't be taking any bold positions heading into Wednesday afternoon.

Not only are the wave patterns unclear, but oscillators like the Stochastic and RSI, which had given buy signals at the lows, are stuck in the 50's which is to say that they are nearly equal distant from overbought and oversold levels. And if technical uncertainty wasn't bad enough, we see  reports this morning that Jean-Claude Trichet warned that 'governments that had borrowed billions to fight the economic crisis, had no room for more debt' while at the same time, Chinese Premier Wen Jiabao has been quoted as 'pledging to continue to pump money into the financial system to sustain growth'. Additionally, the World Bank is now predicting a deeper recession than it had predicted in March while the IFM had recently upgraded their projections. The truth is that nobody knows for sure how things will play out but most will have adjusted their opinions after 2:15 on Wednesday.  

While the Fed has struggled to keep long-term rates down, the short-term rates that they have direct control over are also in play to some extent. Several weeks ago, the BLS released what at any other time would have been a terrible jobs report but in this environment, the lost of more than 300,000 jobs was taken as a 'green shoot'. Immediately upon the release of that news, the fed fund futures markets priced in a rate hike by November and while prices of those futures are now nearly back to where they were before the report, it still reflected a large amount of anxiety with regards to the intentions of the Fed. The statement they release on Wednesday can throw a large bucket of water on that fire as well as clear the air with regards to continued attempts to hold down longer-term rates. While this meeting may not have the same type of an effect on the markets as did the one in March, it is still very likely to contribute to some increased volatility.

One article I read this morning reflected 2 numbers that I hope influence the decisions being made by the Fed. Earlier this month, 30-year mortgage rates hit their highest levels since November while an unrelated report showed that mortgage applications were recently reported to be at their lowest levels since November. It isn't too difficult to connect those dots.

Stocks may be worth mentioning here as well. From the highs 2 weeks ago, the decline looks to be a clear 5-waver and this morning, following a rally back to what a wave analyst would call the '4th wave of a lessor degree' on Friday, a great target for a corrective rally to end, we have take out the lows from Wednesday. That seems to suggest that a second, similar impulse down will develop with targets based on wave equality, very close to the lows from mid-May near 875. That would seem to suggest higher bond prices but again, the stocks have just as much at stake on Wednesday as do the bonds so we likely will need to wait a bit longer to see the decline develop assuming the wave patterns prove to be correct.

While the only clear signals being sent from the markets right here is to be extremely cautious, one thing we've notice that may merit mentioning is that a 21-day moving average on a 10-year yield chart comes in today at 3.713. We mention this since the last time we closed below that average was on 4/02 when the yield was 2.75%. Since that day, while the average had been tested on about 10 occasions, it has only been breached on an intra-day basis twice, with no closes below it. So while not really willing to get aggressive in here, it would be a welcome relief to see a close below 3.71.

6/19/09 - 9:00 a.m. - Never underestimate the power of a downtrend. That statement could hardly be questioned following the carnage of the past 2 days. From Wednesday high to this morning's low, the 10's lost more than 2 points while the 30's were giving back more than 3 and while the lows from last Friday remain intact, they can hardly be considered safe. Following 2 consecutive friendly inflation reports, the fixed income markets had all caught a bid early in the week but while things were looking up for a low to be in place early in their window of timing, the rally stalled right where I feared it might, just a few ticks above the first good minimum objective in the upper 115's in futures and just a few ticks below the equivalent in cash. Yesterday the news, while good for the economy, was not very good for bonds as first continuing claims showed their biggest weekly drop since 2001 and then the Philly Fed Index was reported at -2.2 while the consensus was for -17. LEI came in at +1.2 with the consensus there being +1.0. Collectively, these indicators have provided more evidence that we may have turned the corner with regards to an economic recovery and whether one cares to believe that or not, add stronger than anticipated economic news to a fixed income market that is already in a longer-term down-trend and 'what you get is what we got'.

The fact that the 10's have now given back more than 62% of their recent gains while the 30's have given back over half of theirs, coupled with the absence of a clear impulse wave up, leaves me with no alternative but to be defensive unless and until the patterns improve. I underscore the word 'clear' in that last sentence since the structure of the rally can be read as either impulsive or corrective but given the recent weakness and the continued timing window for a low that extends into next week, I am just not willing to commit to anything beyond a guardedly optimistic outlook. From current levels, the best to hope for may well be a recovery by Tuesday that places us near the middle of the range established since the lows last week, which would be near the 114-09+ area in the 10's.

In addition to economic news continuing to improve, a Merrill Lynch fund manager survey shows a majority of fund managers to be 'overweighted' equities for the first time since 12/07, which is perhaps the best sign I've seen that risk aversion is no longer in the forefront of the minds of investors. The same survey also showed that the number of fund managers who are 'overweighted' in cash to be at 12%, down from 20% last month. These sorts of numbers in this economic environment may prove to be leading contrary indicators but for now, they only go to explain why bonds are continuing to perform so poorly while stocks have done so well.

I also see that mbs purchases by the Fed last week translated to the lowest daily average since March and that may be giving investors reason to await some news from the FOMC with regards to what their plans may be going forward. The still have plenty of dollars allocated for mbs purchases leaving one to wonder why they have not been more aggressive of late. Yesterday afternoon, Fnma 5's traded at nearly the same price that Fnma 4 1/2's had traded earlier in the morning and if that sort of price action doesn't speak to a need for support, it's hard to say what does. 

I don't really see any significant support numbers this side of the bottom in futures and very close to there in cash. The 30-year futures have a virtual 'air pocket' between here and more than a point lower where I just cannot find any support at all and that speaks to keeping long exposure to a minimum in here. I do expect a recovery before Wednesday and being somewhere near the middle of the range seems to makes sense as a target although right now, just holding the lows will be a welcome relief.

6/18/09 - 9:00 a.m. - The window of timing that we are currently in which calls for change of trend - and in the current environment the timing is obviously for a low - seems to be hanging over the markets like an anvil. Around noon yesterday, all looked well as the 10's were very solidly bid for and they even pushed slightly through the 115-22 resistance area that we figured would hold them back through the FOMC meeting. The short-lived push to 115-25, however, was not enough to carry the cash 10's through their equivalent of 3.54 posted in yesterday's update and what has ensued has been a break of more than a point and a pattern that suggest that more selling can be expected. The area of 114-06/10 now becomes important from a short-term perspective and while it seems like a good bet that in the past 4 days, we may have seen both the best and worst levels we can expect to see until we can get past the FOMC meeting, below 114-06 a fully defensive posture would seem appropriate. While the rally from the bottom is countable as a 5-wave advance, it can be interpreted as a 3 just as easily so I am taking nothing for granted in here. Below 114-06 and especially below 114-01, and a test of the bottom at 112-25 becomes a very real possibility and I still view the 25th as an important timing day should we be making new lows. 

The Jobless Claims number this morning, like the unemployment report of 2 weeks ago, reflects a labor market that while still in a lot of trouble, is just not quite living up to the bearish expectations of economists who may have lowered their expectations too much and that too has weighed on prices. And the oddity of mortgage spreads tightening on the rallies and widening on the breaks persisted right up to the highs yesterday and right through the opening this morning. Some wild gyrations early today have only added to the uncertainty of what is going on in mortgage land and that only goes to underscore how important it will be to be properly hedged if the 10's do, in fact, head back to the lows. Timing and pattern considerations taken together seem to leave us half way through a mine field, not exactly the spot at which one can relax.

As mentioned yesterday, for the past 3 months, stocks and bonds have traded in opposite directions with the most recent extremes seen in both markets on Friday of last week. While the pattern in stocks is not clear, I have 2 upward sloping channels on my charts that came in yesterday just below 905 and just above 899. The low yesterday was 904. Today the values are 908 and 901. If we can continue to hold those channels, another rally can commence but below 900, I would have to think that the 875/880 will be tested while 924/930 is the area that must be exceeded to break the short-term downtrend. The weakness yesterday was widely attributed to downgrades by S&P of 18 domestic Banks so now it will be interesting to see if the previous 3 down days will prove to be a case of 'buy the rumor and sell the fact' (in this case sell the rumor and buy the fact) or if this recent break is the beginning of something much bigger.

From here, I expect to see the 10's test the 114-06/10 support area and while I expect to see at least a bounce from very close to 114-09+, whether or not it ultimately holds is uncertain as well as crucial. On the upside, trades above 115-06/08 will be friendly and suggestive that we can still see higher highs and as was the case yesterday, if we can overcome the resistance that was best defined as being at 115-22+ in futures but also at 3.54 in cash, then another point can follow.

6/17/09 - 9:00 a.m. - At the lows yesterday, printed shortly after the opening, the 10's had retraced a shallow 28% of the preceding rally and hesitated even after a friendly PPI report. The patterns looked friendly enough but a deeper pull-back still seemed likely. Likely or not, the market just wouldn't stay down and by noon, the 10's filled the gap that had held them back for several days and extended the rally that has now produced 4 consecutive better closes for only the second time since January. The CPI number released this morning also beat estimates and once again, the rally has been extended as prices are now approaching the first area of objectives in the upper 115's. A trade above 115-23 would suggest that the mid 116's will follow although it may be a little optimistic to look for those levels in front of next week's FOMC meeting. None the less, the lows established last week are looking safer and safer with each passing day. Worthy of notice is the fact that for the past 2 days, the long end of the curve has flattened on the 2 friendly inflation reports offering more evidence that much of the selling was in fact, inflation related and that fire seems to have been extinguished - for now.

As mentioned in Monday's update, the 114-29/30 area not only represented a gap but also an important retracement area from the highs on 5/29. It is now safe to say that leg has completed but it is still not entirely clear that the impulse from 3/18 has finished. It is still possible that the move from 5/14 represents the 3rd wave of the bigger move from March and the futures will not test the 50% correction of that move until they reach 116-20, however, the cash 10's need only to trade through 3.54 to better the 50% correction of the sell-off from 5/14 not to mention the fact that the 30's have slightly penetrated their equivalent this morning so while we don't yet know that the bigger impulse from March has completed, evidence suggesting that is has is mounting.

Mortgages continue to out-perform treasuries during this rally, attributed by some to be a function of falling production numbers being more than off-set by purchases by the Fed as well as investors who apparently avoided much of the carnage of the past month. A chart of Fnma 4 1/2's displays several interesting and friendly technical features as the entire move down that began in December, appears to be a corrective ABC with the C-wave now appearing to be complete as well. Trades a little over par would all but confirm that assessment although we're still not entirely convinced that wave patterns on mbs charts are all that reliable. The other interesting aspect of the Fnma chart is that at the lows last week, they had perfectly filled a gap left back in November suggesting that for whatever reasons, investors - not likely the Fed - had used that area as a 'trigger' to begin buying. The really good news is that as bad as things looked for the past month in all fixed income markets, now the mbs are benefiting both from a rally in treasuries as well as a tightening of spreads which is not something we would have foretasted.

While there isn't any news that is compelling enough to report on, one market we haven't mentioned much of late has been the equity market which seemed to have defied all odds as well as gravity during its' historic recovery that saw the SPX rally by 43% in just 3 months. Finally, the bid there seems to have been interrupted although the pull-back so far hardly confirms that any sort of top is in place. Some cycle work suggests that July is a more probable time for a significant high but for now, it would take a trade below 880 to offer much in the way of evidence that we may be beginning a meaningful decline while trades back over 930 would suggest that we are not. We may want to keep an eye on those levels as it seems like more than just a coincidence that following near uninterrupted moves in both stocks and bonds - in opposite directions - that both have for now, changed directions on the same day.

Moving forward from here, 115-22+ will likely be a barrier of sorts for the futures as will be 3.54/55 in cash. If we can best those 2 areas, then 116-12/20 may be forthcoming before FOMC and that area, for many reasons, may prove to be the most important one left to deal with for a while. While this may be repetitive, once we know that the impulse from 3/18 has completed, a 6-8 week rally of as much as 75 or so bps can be expected.

6/16/09 - 9:00 a.m. - Today's opening offered up a stark reminder of the importance of the need to respect trends, gaps and Fibonacci retracements as all three seem to have conspired to cap the 3 day and better than 2-point rally, despite the fact that the 10's closed within just a few ticks of the best levels seen in more than a week. Following an early burst yesterday that narrowed the gap left on June 5th from 9 ticks to just 2, the 10's backed away and regrouped for a secondary push that shaved off 1 more tick in the early afternoon - the cash managed to fill its' gap - before settling in to a 5-tick range for the remainder of the day. In the overnight session, the markets remained strong until shortly after midnight when the futures managed a trade just over 115 before giving up more than 5/8ths of a point in front of todays' opening, leaving the gap as well as the 50% correction of the last leg down at 114-29+, mentioned in yesterday's, intact and leaving one to wonder whether the 3-month downtrend has indeed been broken. Despite all of that, it doesn't take a lot of imagination to count the rally as a 5-wave move suggesting that following a likely corrective pull-back, we should get a secondary rally into at least the mid 115's. Targets for the pull-back begin in the low 114's and extend to about 113-19 so for now, the charts can still be construed as constructive but we would hasten to remind anyone that by most any means of analysis, the downtrend has not yet been broken and the timing for a still lower low is still very much intact. While I like the prospects for at least a 6 week rally from in here, this is not the spot to let down ones guard.

Despite the lower opening, the markets have had trouble recovering despite a much softer than expected PPI number, although in fairness, that report was offset somewhat by stronger than anticipated Housing Starts and Building Permits. Still, for now we would expect to see a secondary rally develop, perhaps as early as later today. The really good news comes in the form of a tightening of MBS spreads as the Fnma 4 1/2's have actually outperformed the 10-year on a tick for tick basis since the lows. It is a little counter-intuitive to see spreads widen as prices are headed down, and then narrow during the rallies but that is exactly what has happened of late as investors seem to have just been waiting for any sign of a low before committing to buy mbs. Another news story that surfaced that may explain some of the weakness comes in the form of news that the Japanese public pension fund, the largest in the world, announced it was going sell Japanese Government bonds to cover payments to retirees. While that may have no real immediate effect on our securities, it does underscore the financial problems plaguing nearly everyone today and it is just that sort of thing that bites into the demand for treasuries. There was also a report showing a $53 billion outflow of US Assets in April, although most of that seems to have been out of very short-dated T-Bills and not notes or bonds, and into riskier and higher returning assets. While CPI tomorrow can have an impact on the markets in here, we still suspect it is the FOMC meeting next week that will seal the deal one way or the other meaning it will likely insure that a low is in place, or it will create that low and most likely by no later than the 25th.

So from here, we can only await a push through the 114-30 area which should usher in another up-thrust with targets in the mid to upper 115's at the very worst. Above 115-24 and we can begin to target the mid to upper 116's while only a trade below 113-19 will give us cause to think the lows are not yet in place.

6/15/09 - 9:00 a.m. - Friday's extension of Thursday's reversal served to complete what appears to be a 5-wave rally from the lows implying that at least one more similar move will follow, but having stopped just 1 tick shy of the 6/05 gap on Friday, it also proved that not everyone is ready to declare the bear dead - not just yet. Following the reversal from 4%, the 10's were at 3.75 a day later which was not only the area of the gap in cash, but it also represented the high yield from 5/28, which had defined the worst end of the trading range that contained the 10's until 6/05. While gaps certainly qualify as 'technical' levels, 4% and 3.75 also qualify as 'psychological' barriers as well as just simply important areas to anyone involved in the markets who doesn't make short-term decisions based on charts. It seems that absent a clear opinion as to what the markets were going to do, traders were willing to buy and sell against the 'obvious' support and resistance levels and let things sort themselves out. So now, does this secondary rally target 3.50? Well, maybe but not so fast.

Believing that the move up in rates from 3/18 is the 3rd wave of an impulse sequence that began in December, the Fibonacci retracement levels of the move from 3/18 to Thursday's extreme could become important targets going forward but first, it will be important to determine that the entire move has actually ended. The last leg of what may be a completed impulse from March appears to have begun on 5/29 and if you do the math, you will see that the 50% correction of that move in futures is at 114-29+, just a plus from the top of the gap. So for multiple reasons, the top of the gap in futures can prove to be very important. Move above it and evidence that the impulse from 5/29 has ended will be very strong and if that impulse has ended, then we will look to the next bigger impulse  from 5/14 with retracement targets beginning at 115-22+. We already think that the chances for a recovery from here are good based on a potentially completed impulse wave, a good area from which to have turned (4%) and last but by no means least, the timing. Not only have the fixed income markets made very significant turns in this general time frame every year since 2003, 3 of those 6 years saw the turn come on June 13th while another had a near double top test of a week earlier turn come on 6/14  That made Friday or today very compelling dates, leaving  the current turn potentially a one day miss and just too close not to embrace. The next best date now appears to be 6/25, just a day after the FOMC meeting, when the third wave from March would equal the first from December, in duration but hopefully the patters will have told us just where we are prior to that date.

I'll dispense with any sort of news summary this morning as focusing on price action seems more crucial to the short term. Watch for problems below 115 as a failure from there, especially one that produces a lower close, can serve to undue all that has been done since Thursday morning. Absent such a failure and we can begin to establish much better targets for what we believe will be a multi-month rally. The first problem area should it be penetrated will be at 114-04 although trades into the mid to upper 113's are acceptable. 

6/12/09 - 9:00 a.m. - Call it what you like; a 'dead cat' bounce, a post auction relief rally or a bottom. Whatever it was, the markets finally got some good news in the form of price action a,s after an opening gap through 4%, the 10's began a recovery that carried them back to unchanged by the time the 30-year auction went off and added another point following the auction. They finished the day with an outside up reversal and even if they couldn't sustain the 3-tick push through our first important bogey at 114-08, this morning they appear to be correcting from the high and should they advance through it later today, the rally will appear to be 5-waves and that would suggest another will follow and any secondary rally now should threaten the gap left from 6/5. The turnaround comes from a great psychological level (4%) and just a day in front of what we felt was the best 5-day timing window in quite a long time, seemingly leaving the markets in good position to continue to improve. Lest we get too excited too soon, however, the downtrend that has been in place since mid-March and resulted in more than 150 bp yield spike was very powerful indeed and must still be respected, especially given that from our perspective, we are only just entering a window of timing that extends out to 6/25. Things are looking up but we are not out of the woods just yet.

It wasn't all that long ago that I reported that daily oscillators had reached oversold conditions and had in fact built bullish divergences which are typically read as 'buy signals'. That didn't stop the decline then but it is still worth mentioning that in addition to the obvious fact that we are now even move oversold, at least with regards to cash the divergences have become much more pronounced and they show up on the weekly chart as well, as does a 'key reversal' bar. It isn't the outside bar that we got yesterday on the daily chart but it is a reversal nonetheless and thrown into the kettle with the 4% area, the timing and the potentially completed wave pattern from 3/18, there is more than just a chance that we could have seen a low. Most traders will now likely shift their focus to the FOMC meeting the 23rd and 24th and few fundamentals have changed so while we may not see the markets fly away from here, the worst - if not all - of the downward spiral has probably come to an end.

In addition to having a good technical base for a rally, good news came from several directions yesterday as the Japanese Prime Minister said "our trust in US Treasuries is absolutely unshakable". The timing for that statement of support could hardly have come at a better time given that just a day earlier we were reading that Russia and Brazil were diverting cash away from Treasuries. Indirect Bids at yesterday's auction (those that include foreign Central Banks) were very high and that no doubt helped the markets rally and we also see that an index of Credit Default Swaps of sovereign debt reflects half the amount of risk that it did in February, but as one might expect all of the news isn't friendly. It is being reported that there are divisions developing at the Fed with regards to whether or not they should expand or even continue with their asset purchase programs when they convene in 2 weeks. One report suggests that they are concerned with how they might be able to unwind the purchases without disrupting the markets while another suggests they might extend the deadline for the existing program which would only go to diluting whatever effect they may be having unless they increase the size of the proposed purchases. They have only spent about half the money allocated for Treasures and less than that for MBS and with what results? A research study suggests that for every $100 billion of treasuries purchased, rates will drop .05 to .08% but one has to wonder where that number came from since they have spent $156 billion since March and rates are up 150bps. And finally from the news desk, perhaps the most telling of stories we read this morning states that while the IMF thinks that the recovery may expand at a much faster pace in 2009 than they had thought, the World Bank thinks that 2010 will be worse than their previous forecasts. A little for the bull, a little for the bear.

Let's focus on the positives in here which I believe now outweigh the negatives and look for the markets to continue to improve as we get closer to the FOMC meeting. Reversals in oversold markets that come with such good timing indications and from such a good psychological area as 4% - remember the last time anyone could buy a 4% 10-year was in October - have a good chance of attracting buyers, especially any who may have been short. Once a low is in place and if it isn't now, then I suspect it will be from no worse than 4.11, a 60-80 bps rally that could last 6-9 weeks is likely to develop and that assumes it is only a correction in an ongoing bear market - my current preferred count.

6/11/09 - 9:00 a.m. - I expected to see some volatility around the 1:00 auction time yesterday but nothing like what happened. While it was the 10-year being auctioned off, the real fireworks came in the 30-year, which dropped 3/4's of a point almost immediately while the 10's were falling just 10 ticks and then recovering 9 of them. The 10's eventually traded off half a point but still, it was surprising to see the real damage come in the 30-year and it seemed to leave nearly everyone expecting continued pressure through the 30-year auction today. That may be the best thing we have going for us today as whenever everyone says the same thing regarding a market, it is usually wrong. One thing that does seem apparent is that the strong 3-year auction on Tuesday did indeed come at the expense of the longer-dated issues. With that dark cloud in the form of the next auction hanging over the markets this morning, the 10's gapped through 4% but recovered almost immediately and may well have already entered into their holding pattern prior to an expected 1:00 departure from this area. If we break the 4% area again, then 4.10/4.11 should be our next stop as that area will give us a Fibonacci relationship between this presumed 3rd wave from 3/18, and the 1st wave from December as the latter would then be 1.618 times the former. Additionally, just prior to the free fall in yields late last year, there was a month long, 85 bp yield rally that stopped at 4.10 so we view that area as important from both a wave perspective as well as just an obvious support point.We have failed to hold quite a few other 'obvious' support points during this latest purge but timing still suggest a change of trend is coming within a week or so and the next Fibonacci relationship for this 3rd wave is near 4.50, a bit far off to think reasonable in the next 2 weeks.

One bit of news that seemed to start the markets off on the soft side yesterday came from Alexey Ulyukaev, first deputy chairman of Russia's central bank, who said that 'Russia would slowly cut the amount of U.S. Treasurys in its mix of reserves'. This morning there is related news saying that both Brazil and Russia will be 'unloading Treasuries to buy IMF securities' so when we need it least, we are getting more indications of a waning demand for an asset that is growing in supply. Those obviously bearish stories may be offset somewhat by several others that we see which are not so friendly from the economic recovery standpoint. The first is in regards to concerns at the ECB regarding the health of 25 banks which they deem crucial to the heath of the Eurozone financial system. Dejan Krusec, the ECB's financial stability expert, said "the banks are strong enough to weather the current downturn so long as there is a rapid "V-shaped" recovery but not if it takes longer to refloat the economy". So to translate; the banks they deem critical are just fine in a best case scenario - ouch. The other stories that caught our eye this morning are closer to home. One address the option ARM market and suggests that 'option ARM recasts, or changes in the minimum payment, will soar to $8 billion a month in late 2011 from $1 billion now'. This they suggest - and who could argue - will keep the housing market in the weeds for some time to come. Another talks about impending defaults on bonds backed by interest only commercial loans which analyst say will see monthly payments jump as much as 20% or more in the next year. So as usual, we have some bullish news and some bearish news but we also have an auction of bonds that nobody seems to want in a market that only wants to go down. Surely that will change but when?

I keep mentioning the timing that I feel is best between Friday and next Thursday but which in previous discussions, I have suggested can stretch out to 6/25. That 6/25 day came from a rather minor Fibonacci count but now I notice that on 6/25, the yield rally that began on 3/18, will exactly equal the one that began on 12/18 and ended on 2/09. In other words, on 6/25 - during the FOMC meeting - wave 3 will equal wave 1 with regards to time - a typical wave relationship. A low is coming and it is likely coming in this timing window and for now, on any new low, I like the 4.10/11 area. On the upside, we still need trades above 113-28 for a pulse, above 114-08 for signs of recovery and above 114-28 for an all-clear.

6/10/09 - 9:00 a.m. - For the 1st time since the hard break on Friday, all of my charts are doing the same thing - making new lows. While the 10-year futures managed to print a new low by just a plus early this morning, the cash made a clean break of Friday's 3.90 print and at the same time, the 30-year futures and cash were both posting new lows as well. Even though I would have preferred to see the cash 10's hold onto that 144 bp 3rd wave low, at least now the markets are in a position to give confirming signals one way or the other. Should we find support in new low ground and reverse to the upside, at least I won't have to be 'hedging my bets' on pattern due to conflicting signals from the various charts I monitor. Talk about a stretch in the search for good news.

And speaking of news, there really isn't much to report on beyond what is happening in the markets themselves. Commodities continue to rise as oil as well as industrial metals have now printed their highest levels in more than 7 months. At the same time, the Dollar continues to deteriorate and whether or not the Fed cares to acknowledge it, the word 'deflation' is no longer being bantered about and instead, inflation fears seem to have taken over. Fed Fund futures reflect the clear opinion on the part of someone that the Fed will be raising rates in November and while nobody on Wall Street says they believe that to be true, if they put their money where their mouths were, those fed fund futures just wouldn't be trading where they are. The fact is that were the Fed to actually step in and raise short-term rates, it probably would support the dollar and it very well could support the longer end of the yield curve and possibly mortgage rates as well since it would likely discourage further selling by the inflation hawks.

Aside from all of this speculation, the fact remains that the markets have gotten clobbered this year with the worst of the damage done since the March FOMC meeting when the Fed pledged to support both the treasury and mbs markets. It is just about impossible to read the action since March as anything but a 3rd wave and Elliott would teach that trying to pick a bottom in a 3rd wave can prove to be very expensive. From what at that time was the all-time yield trough in June of 2003, it took the 10-year nearly 3 years to lose as much ground as it has lost in just the past 6 months. So with all of this evidence that we are impulsing down in a 3rd wave, where can we expect it to stop? Maybe 'where' isn't as important a question to ask as 'when' and the best window for timing begins on Friday and extends through Thursday of next week. One does have to wonder though if the FOMC meeting the following week is not what everyone is waiting on.

Yesterday, the Treasury auctioned off 3-year notes and the auction went well, especially from the perspective of foreign buying. It remains to be seen if that is an indication that the 10's and 30's, going off today and tomorrow, will go well or whether the surprisingly good demand by foreigners for our 3-years came as a substitute for their buying the longer dated issues. Expect to see some volatility around the 1:00 auction time and unless it goes very poorly, expect to see some improvement in the market following the auction as the dealers sell the bonds they bought and uncover their hedges.

We can be looking at lows in here, especially since all of the markets are trying to recover from new lows of the move made on the opening. We mentioned yesterday that if the 10's could print 113-29, that would represent the largest rally since 6/03 and offer a first sign of life. The rally stopped at 113-28. Having made a new low this morning by a mere plus, they now need to print 113-28+ and if they could manage that today, it would also represent an outside day and the first 'higher high' since 6/03. Still, the first and best sign that the purge that began in March has ended will come when we fill the gap left on 6/05 at 114-30.

6/09/09 - 9:00 a.m. - For the 3rd consecutive day the10-year attracted few buyers and printed new lows of the move heading into the close. The 30-year and the cash 10's both continue to languish near the lows from last week but the good news is that those lows are still holding. For the record, the WI 10's broke the 3.90 level late yesterday but those yields don't show up on the yield charts that I - and most others - use since the WI bond has yet to be issued, so for now and hopefully going forward, we still show what we believe to be a 3rd wave from 3/18, as having traveled 144 bps. The futures printed 112-31+ shortly after the 3:00 close yesterday, just 2 ticks from that 112-29+ Fib. based target I posted yesterday. Still, absent development of an impulsive looking rally, we need to see trades above 114-08 and better still, above 114-27 before there will be any concrete evidence of a low.

While the longer end of the curve has taken significant heat of late, it pales in comparison to what has happened to the short end. From Thursday thru Monday, the 5-year spiked 52 bps while in just 2 days, the 2's moved 44. Those moves seem to be in response to - or perhaps concurrent with - fed fund futures pricing in a 58% probability of a rate increase by November. A survey of 15 Primary Dealers shows that none of them agree as 10 believe that the Fed will hold rates steady until 2010 with the other 5 expecting not to see rate hikes until 2011. One would think that with all of the Primary Dealers in disagreement with the futures markets, they would simply trade against them and bring the price back to what they feel is correct so one has to wonder how much conviction they have with regards to those survey results  One good thing that the spike in the short end has accomplished is to narrow the record setting spread between 10's and 2's from 281 bps to 249. That could help to take some of the wind out of the sails of the 'inflation hawks' and in turn, help to stabilize the long end of the curve. The bet being made by futures traders that the Fed may raise rates soon rather than later comes amidst further evidence that the economy is rebounding and especially, that the banking sector continues to strengthen. It is being reported that the Treasury will allow 10 banks to repay TARP loans early as they continue to show signs of balance sheet improvement. There is an interesting twist to that story, however, as a Congressional Oversight report, while generally praising the stress tests conducted by regulators, points out that those tests assumed an average unemployment rate this year of 8.9%. With Friday's BLS surprise showing the current rate is 9.4, one has to wonder whether or not the stress tests have assumed enough stress. This should be an interesting story to follow.

While still wanting to see prices in the 114's to have any sense of comfort with these markets, at 113-29 the 10's will have experienced their largest rally since 6/03 when they closed above 116. At least that would be a start. Coming off of a new low just prior to the close yesterday, it is too soon to get much of a read on pattern but from any high, if the 10's could back and fill and then rally again, that 114-08 could get tested and the patterns may get more constructive.

I keep mentioning the timing which I feel is better for later this week if not next week, and on that front it might be worth mentioning that yesterday, one of the larger Wall Street firms circulated a short piece addressing that same timing. The only surprise on my end is that it has taken nearly 6 years for anyone of that stature to make note of a pattern that has worked so well. The only thing one knows for certain about such timing patterns is that they never last forever and the more exposure they get, the more difficult it is to trust them. I doubt this single published piece will interrupt the pattern this time, especially since we are so far along in a wave count that seems perfectly consistent with a trend change in the next week or so but suffice it to say I would have been just as happy not to read that little gem.

6/08/09 - 9:00 a.m. - At the time that I sent out the update on Friday, it appeared that we needed to see a lower low printed either late Friday or early today to cap off a small degree impulse from the highs on 6/03. Very late in the session we got lower lows in the futures markets although the cash markets held their early lows which may bring the pattern call into question but it does keep that 144 bp move for the 3rd wave intact which could prove to be a 'best case scenario' for my outlook. Unfortunately, there is scant evidence that any sort of low has been seen as everything that the market has done since Friday morning looks corrective, suggesting still lower lows need to be seen. As far as price is concerned, I would want to see trades above 114-08 to offer the first suggestion that a low may be in place while trades above the top of the gap left on Friday's opening at 114-27 would be a much better indication. I am still of the opinion that a low will be printed very soon that will prove to be the bottom of a bigger impulse that began on 3/18 but it will be more prudent to let the market tell us it has bottomed than it would be to try to pick that bottom. I have often mentioned the timing for mid-June and for the record, since 2003 the 10-year treasuries have posted major trend changes in mid-June each year with 4 of those 6 turns occurring between the 13th and 18th. That would suggest next week is better for the timing although one could make that case that Friday works just as well. The bottom line is that for now, I just see no evidence that a low is in place although I suspect that the 3 month downtrend is very nearly complete.

One thing that Elliott teaches is that frequently, a 3rd wave in an impulse sequence is related to the first wave by a Fibonacci ratio and we can use that tendency to project where this third wave might end. Basis the futures, from the 3/18 highs, the 3rd wave would equal 1.618 times the first wave at 112-29+ and so far, the low of the move was printed overnight at 113-00+ although the daytime session low stands at 113-10. Should we trade to a new low, that 112-29+ would be a nice target. In cash, the 3rd wave would have been 1.382 times the first at 3.87 and of course, we have already seen a 3.90, so while we can hope that it holds, the next Fib. based target there would be around 4.10. There are other, higher and very solid support levels but it is prudent to respect some of the deeper targets given the strength of the downtrend. 

The stories circulating this morning offer little in the way of 'new' news. It has been reported that International issuance of Debt increased 25% in the first quarter but given that the first quarter ended 2 1/2 months ago, that isn't exactly news. More telling is a story I read this morning that includes the following passages; 'Bernanke and other Fed officials say the improved economic outlook and rising federal budget deficit are the catalysts for higher borrowing rates, and see no need to increase purchases of bonds'. This goes to the same thing I brought up last week regarding an apparent reluctance on the part of the Fed to acknowledge that inflation fears are contributing to the run up in rates, whether it be correct or not. When asked on Friday what the Fed should do about the recent increase in rates, William Dudley, President of the Federal Reserve Bank of N.Y. said "To the extent yields are going up because the economic outlook is brighter, the answer would be, don’t do anything” . And on a subject closer to home, when asked about further Fed intervention into the mbs markets, he said "our goal is to be a significant portion, say more than 50%, but less than 100%. To the extent yields back up and mortgage origination slows, we might want to slow our purchase programme because we dont want to be 150% of the market". That seems to create a Catch-22 whereby if mbs rates go too high, the Fed might not want to step up their purchases although the whole point of the program is to keep rates down. Despite what they say, it still seems like only a matter of time before their hand is forced to do something unless the market turns up and does it for them.

So with a relatively quiet eco calendar this week, I'll just have to wade through the little swings looking for some sign from pattern or price that we may have found a bottom. Until then, it is just not safe to 'get back in the water'. 

6/05/09 - 9:00 a.m. - The Defense Department couldn't have dropped more bombshells on the markets this morning than did the Labor Department as the Unemployment Rate came in well above expectations while the more important NFP number was way, way below. The unemployment rate, which captures many of the headlines, shot up half a percent to 9.4 while surveys showed market participants were expecting 9.2, a miss that on its' own might have attracted a strong bid but the NFP number, which was expected to come in around -520,000, instead came in at -345,000 and to add insult to injury to anyone long bonds, last months reported losses were revised down 35,000. That was enough to break both the 10's and the 30's more than a point each and carry the cash 10's to a 3.905, the highest yield seen there since November 4th. For the record, the high yield on 30's hasn't been seen since 6/19 of last year. The very short-term charts now suggest still another marginal new low is needed to complete a small impulse that began 2 days ago and they also suggest that it should occur by later today or Monday, beyond which time we would have to read that impulse as completed regardless of pattern. Whether or not this is the bottom of the move that began on 3/18 remains a mystery. One thing does stand out about today's worst levels, however. At a 3.90, the high yield printed by the 10-year, was 144 bps from the low yield on 3/18, which is not only a Fibonacci number but also a very important Gann number, so while there may be little evidence to support a low based on patterns, and even less of a reason to think that the market would turn just because it moved a Fibonacci number of bps, you only have to look back to March, when the SPX hit 666, a number we're all familiar with and, well, we all know how that worked out.

So now we can add the NFP number to the ever growing list of reasons to believe we may have turned the corner with regards to the economy. An article we read this morning is right in line with our suggestions yesterday that the run-up in rates is more a function of inflation fears than anything else despite what Chariman Bernanke tells us. It points out that Crude has hit its' highest level since November, Gold is once again flirting with $1,000, the Dollar has reached levels on the downside not seen since December and the spread between 10's and 2's made another all-time new high yesterday. Add a strengthening economy to the mix and you have all the ingredients for a bear market in bonds. But while there is plenty of evidence that the economy may have turned the corner, virtually everyone with an opinion a few months ago told us that without a recovery in housing, an economic recovery would be sluggish at best and not only do we have scant evidence of a housing recovery, but we were also told by the Fed that they needed to keep lending rates down to stimulate the housing market and we know they have not succeeded there leaving one to wonder whether this recovery can be sustained. Economists have offered up a virtual alphabet soup of descriptions for how the economy will bottom; from an L-bottom to a W-bottom with a V and a U in between. Almost none gave the V a very high degree of probability but right now, the V seems to be what we are looking at with the first half of a W an equally good candidate. Were the W to prove to be the correct description, the economic news would likely begin to deteriorate soon and in a big way.

For now, we will move through today preparred to see the markets remain under pressure unless they can trade to a new low and recover. In all likelihood, however, we will experience the worst weekly close in quite a long time and that would leave us to believe, at least for now, that Monday could see some additional weakness but let's not forget that one of our 2 preferred scenarios called for one more new low and that scenario can complete with the next down thrust. Beyond early Monday,  I would expect to see a rally begin to develop but it is just too early to determine if it will be the beginning of what should be a 5-8 week correction of the last 144 bps, or just a speed bump on the way to a 3rd wave low that still needs a few weeks to complete.

That silly 'ole 144 bps move from 3/18 does suggest, at least to me, that the more friendly of my 2 scenarios may well be the better guess right now. Futures are only about 13 ticks from the lows while cash has improved a full 13 bps so even if we get a new low in futures, if it isn't a real blow-out new low the 3.90 is likely to hold and if this is the bottom of the 3rd wave, then the next 5-8 weeks could see us improve by 50-90 bps. The problem with getting too friendly in here lies with the timing for later this month and waiting until Monday to become to bullish is probably not a bad idea.

6/04/09 - 9:00 a.m. - With regards to wave patterns, yesterday did nothing to help us sort out just where we are. The simple fact that the markets opened lower this morning and just don't seem to want to move away from the bottom  lends some credence to the wave count suggested by the cash charts, which calls for another new low below those from last Thursday before the down-leg that began on 5/14 completes. That said, one can analyze these patterns until they're blue in the face but tomorrow's numbers are still key. Not that the unemployment rate is necessarily the driving force behind the markets these days but rather that being stuck in a range between 3.50 and 3.75, we need some sort of catalyst to drive us out of here and that is the most likely one on the immediate horizon.

Should the 10's remain in their week-old trading range through today and even tomorrow, one pattern that is beginning to look plausible in the cash chart is a triangle from the lows of last week. The fact that from those lows, we have now rallied, sold off to a higher low and rallied back to a lower high, leaves us with a contracting, triangular pattern and in this position, Elliott would suggest that any triangle must be a 4th wave. That means that from the next push to a new low, the markets should rebound quickly, a view I already hold. To keep the potential triangle intact, we would need to see the current weakness contained by about a 3.72 yield while the next rally would need to be contained by a 3.54. The other interesting aspect of that pattern, should it continue to play out, is that it would suggest a low will be printed possibly tomorrow but given that tomorrow is a Friday, Monday might figure better for a reversal and Monday is the 8th, the first day I have identified as having timing implications in the bigger, 'critical timing window' that exists for the next several weeks. One other interesting development on the technical side is that now, a daily chart of the 10-year futures, shows bullish divergences on both the RSI and the Stochastic oscillators which have made higher lows during this week as prices moved lower. That is a 'buy signal' based on those indicators and while it may not be enough to turn up a market caught in the grips of a strong downtrend, it very much will help to lure in buyers once we do turn up. Again, all this may be academic until we get through tomorrow's report but collectively, it does seem to reflect a light at the end of the tunnel.

More signs and opinions seem to be developing, suggesting that the recession has bottomed out. 3-month Libor has reached its' lowest level on record - those records having been kept since 1986 - while the TED spread is near a 2-year low; both being indications of an easing of fears and of credit. Additionally, a European high-yield, equity-backed bond has been issued, the first since the crisis began. Yesterday, Chairman Bernanke, speaking before the House Budget Committee, expressed some concerns about the recovery and repeated his belief that inflation would remain low, while he acknowledged the need to better manage budget deficits going forward. Those seem to be friendly comments for bonds but at the same time, he said that "the recent rise in long-term bond yields stemmed from a combination of factors: concerns about large federal deficits, greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to hedging of mortgage holdings". What strikes me about that quote is that it makes no mention of inflation, although the 2-year to 10-year yield spread has reached its' highest level ever recorded and that is a clear indication of inflationary expectations in the treasury markets. He may not agree with the assessment, however not acknowledging that inflation fears are one of the main reasons for the sell-off in treasures may not be comforting to those investors who think otherwise. 

Finally, mortgage spreads widened yesterday with the average 30-year rate now having reached the highest levels since February, a month before the Fed acknowledged the need to keep mortgage rates down. It's no mystery that without a recovery in the housing market, economic conditions in general will not improve dramatically. That seems to suggest that it is only a question of when and not if mortgage rates will begin to drop, whether it be on their own or as a result of a stepped up effort by the Fed.

6/03/09 - 9:00 a.m. - Last Wednesday, the 10-year gapped over a 3.50 yield, the first time those levels had been seen since 11/19/08. In the 6 days since then, yields have swung from the 3.70's to the 3.50's 5 times, once dipping into the 3.40's and today they seemingly are trying to make their way back through the range in a positive direction. This comes after the futures markets, both 10 and 30-year, made new lows of the move again yesterday while once again, the cash markets refused to trade through their worst levels from last week. This only goes to further muddy the water with regards to the short-term wave patterns as the new lows yesterday, at least in the 10-year futures, seem to represent a very minor 5th wave low from the highs on Friday which would appear to be the larger 5th wave low from the highs on 5/14. This is in stark contrast to the cash chart which has made a series of higher lows since last week and therefore, continues to look as though it is working through a 'flat correction' and still needs to trade through a 3.56 to complete its' pattern from the 14th. Given the current bid to the markets, we may very well be set up for Friday's jobs data being the deciding factor as to which chart is giving us the best read. Wave analysis aside, being trapped in a range between 3.50 and 3.75 seems to suggest a lack of conviction on the part of most fixed income investors from current levels.

I see this morning that Dallas Federal Reserve Bank Chairman Richard Fisher said yesterday that the Fed has 'successfully pulled the economy back from the brink' and that things are 'getting less worse'. Really, 'less worse'. He added that the U.S. will experience a 'very slow' recovery. That's not exactly a rosy picture he paints but still not so bad either. Meanwhile, the gap between 10-year TIPS and 10-year nominal notes has pushed though the 2% barrier for the first time since Lehman collapsed in September implying that for now, the consensus is that inflation, not deflation, is indeed the bigger risk that we face. Also in the news this morning, Bob Doll, Global Chief Investment Officer of BlackRock, says he believes that we have entered a cyclical if not secular bear market phase in treasuries. Trading 160 bps from the yield trough of just 5 months ago, it's getting more and more difficult to argue with that assessment and it is in agreement with my longer-term wave analysis.

From current levels, we are likely to still need to get past Friday morning before the bigger picture begins to clear up. For starters, yet to be determined is whether the futures markets are correct in suggesting that the impluse from 5/14 has ended - or whether it is the cash charts suggesting one more new low is needed that are correct. The next step will be to determine if we are completing the impulse from 3/18 here, or whether we will need to withstand several more new lows followed by quick rebounds. Either scenario can currently be supported with wave theory. While the wave theory can guide us either way from here, timing considerations suggest that the worst levels we will see are likely not to be seen for another week or so at the least so for now, a great deal of caution seems to still be in order. Short-term, a trade above 116-05 would hint at another point to the upside but until we can trade above 118 or through a 3.38, long exposure remains very risky. 

6/02/09 - 9:00 a.m. - It didn't take too long yesterday to prove that Friday's surge was a relief rally and nothing more. After a 1 3/4 points rally from Thursday's low to Friday's close, the 10's made a new low of the move late in the day yesterday, possibly satisfying the wave structure that appeared incomplete and in need of further downside. The cash market held its' low from Thursday however, so at best there is no confirmation that the new low in futures marks the end of any sort of decline. From the yield trough on 3/18, there appear to be two, equally possible, preferred wave counts. One would place us most of the way through the 3rd wave with the acceleration of the past several weeks representing the 3rd wave of the bigger wave 3 meaning we still need several more probes to marginal new lows before the wave is complete. The other count, however, would label everything since 5/14, as wave 5 of that bigger 3rd and that would suggest that the end of the move from 3/18 is at hand. Heading into yesterday, that move from the 14th appeared to need one more new low to complete so basis futures, it could be done but basis cash, it seems unlikely. A strong move above the highs from Friday will make the first and more immediately friendly scenario, the most likely but absent a really powerful move up, it may be Friday's data that puts the final nail in the 3rd wave low - or this potentially minor degree bounce. While short-term wave patterns can no doubt, be overcome by a jobs report, if we can hold the lows through Thursday afternoon, the duration of the bounce would suggest that the impulse from 5/14 has ended so it is fair to say that the longer we can hang in here, the better but new lows in cash would be best.

Yesterday's collapse in bonds prices came amid further indications that the worst of the recession may be behind us. An index of manufacturing activity registered it highest reading since September and its' 5th consecutive higher reading, probably helping to lure even more money into equities. The rally in stocks pushed the SPX above its' 200-day moving average for the first time since May of '08 when the index was at 1440 and to the first close above that average since 12/07. And all of this coming on the day when GM declared bankruptcy. Who could have seen that coming a year ago? There are also stories this morning suggesting that several of the larger banks may be able to repay TARP monies sooner that previously thought and that they may not need government assistance to sell off troubled assets. The optimism just keeps on building.

From here, if the futures can trade above 116-18, then they should test Friday's 117-01/04 and if they can manage a trade above 117-10, the lows of the move that began on the 14th will likely be in place. Whether those lows would represent the end of the entire 3rd wave, or just the worst of it, remains to be seen. While it will take more time and pattern development for us to determine where we are in the bigger picture, the markets' reaction to Friday's numbers may make it abundantly clear.

6/01/09 - 9:00 a.m. - Finally, a relief rally on Friday and one that didn't come a minute too soon. From Thursday's low to Friday's high, the 10's rallied nearly 2 points although even that only managed to carry the contract back to the highs from Wednesday and while Friday's close was back on the positive side of the trend line drawn from the 6/07 yield crest, there were still 2 closes solidly through that line and that is usually enough to signal an end to a trend. Taking all of the clues collectively that were served up over the course of the near 70 bp spike in the previous 9 trading days, I am of the opinion that an impulse wave began at the all-time yield trough in December, and we are now in the late stages of the 3rd wave which, once completed, should give way to a 5-8 week rally before further new lows will be likely. From that next round of new lows, assuming that my preferred count is correct, a much more protracted correction can be expected, one that should last well into next year. For now though, while it seems that the worst of the damage has been done, I want to remain on the defensive as nearly everything still seems to point the markets lower.

While daily oscillators like Stochastic and RSI, as of Thursday, were at some of the lowest (most oversold) levels seen this decade thus begging for a rally, that alone isn't enough to warrant bringing down the 'storm warnings'. Given some market friendly news - the most likely source being the jobs report on Friday - a secondary rally could develop that would suggest we may actually have seen the bottom of this third wave but until that happens - the cash market needing to trade into the 3.30's - we just can't get too excited about the prospects for a real extension to this rally. Already this morning, the 10's have given back more than 62% of the gains racked up between Thursday afternoon and Friday's close and that too, suggests the bears aren't ready to relinquish control of things.

If you glance through the headlines today, you can see a reference to nearly every bearish thing bonds could react to. There are several references to the old phrase 'bond vigilantes' as well as talk of the debt, possible inflation, China's lack of appetite for longer dated treasuries and the record spreads between 2 and 30-year treasuries not to mention a survey that reflected 79% of economists calling for the economy to expand next quarter. The news couldn't sound more bearish for bonds and that usually signals the onset of buying but until we get some positive signs from the wave patterns, we just can't recommend getting on board this foundering ship. 

We also read this morning that the Fed's mbs portfolio, the one built since they began buying those securities to help hold mortgage rates down, would be 10% under water if marked to market and the suggestion is that they will not be too fast to act to increase those purchases to keep it from appearing that they are being influenced by the gyrations in the market. Given that there are estimates that at a 4.75% 30-year rate, the average a month or so ago, 87% of borrowers were in a position to refinance their mortgages while at today's rate of about 5.25, that number would drop to 43%, it might be time for them to worry less about appearances.