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3/31/09
- 3:00 p.m. - I will be out of town tomorrow April 1st,
through Friday April 3rd and will not be able to post another
update until Monday, the 5th.
2:30 p.m. - I've just looked over a tabular listing of the % of longs, shorts and those who are neutral in the bond market and it is pretty revealing. The particular list I looked at only goes back to September of last year but that does catch the entire 225+ bp rally in the 10-year and during that rally, which ended in December, the % long number topped out at 33% on November 10th, just a few days before the markets exploded to the upside. Today it stands at 42% while the % of shorts is 10%, the lowest reading since September having been 6%. The differential between the longs and shorts is at the highest level since September meaning that by any means of analysis, the market players in this survey are more bullish today than at any time since well before the rally in treasuries began, back when yields for the 10-year were well over 4%. It rarely pays to follow the heard and while I do suspect we will see bonds do better over the near term, if these numbers continue to reflect an abnormally high percent of longs to shorts, during any such rally, that would just go to enhance the notion that this is a correction in a bear market. 9:00 a.m. - I'll keep this report short as there isn't all that much new to report on. The 10's never even managed to enter their gap yesterday although the miss was by a single tick and certainly qualifies as a failure at the gap. They rarely make it easy to trade against such obvious levels and perhaps the fact that we didn't quite get there yesterday, forced sellers to enter at not such good levels as they likely chased the market down, making another attempt at the gap more likely - perhaps. The bothersome thing is that the whole time that the fixed income markets were under pressure, the stocks never managed to make any sort of a stand, finishing with their worst daily performance since the March 9th bottom. One does have to wonder if the promise of the Fed supporting the Treasury market coupled with a faltering stock market cannot collectively make bonds rally, then what will? I don't have that answer but I still suspect that a larger rally will unfold in the near future. A quick recovery from here that produces new highs above the gap would leave the door open for a 5-wave rally interpretation off the lows of last week but absent such a burst, the charts would look more and more like the rally to date is corrective and not the beginning of a new bull market leg to the upside. This is consistent with my current preferred wave count so for now, I am still of the notion that we are in a corrective rally off the bottom, and most likely in the early stages of what will prove to be a B-wave correction from the highs established just after the FOMC announcement 2 weeks ago. I know that may sound confusing but the simple translation if it proves to be true, it that we are probably near the bottom of a large trading range that can persist for several weeks or more. This should give us an improving market for the near term, but not one that can be trusted if we return to the post-FOMC rally highs. As far as stocks go, the decline from the highs of last week looks to be a clear 5-wave move although the it isn't clear whether the 'orthodox' high came on Thursday of last week or the previous Monday. The difference in the expected outcomes is huge. If we view the rally as having ended on Thursday, then we have likely seen only the first of at least 2 significant declines, however, if we assume that an impulse wave crested last Monday, then the break from Thursday would likely be the C-wave and a quick recovery complete with sharp new highs would be the outcome. From a wave perspective, the clues to which is the most likely outcome will come from the structure of any rally or even trading range behavior today and perhaps into tomorrow - but not likely much beyond then. If we trade sideways from the lows established yesterday, it will likely be a correction in front of a secondary decline while if yesterday was the bottom of a C-wave, then a hard rally should commence very soon. This could be key to bonds despite their poor response to the weak equity markets yesterday. For now, any trades in the 10's above 123-30 would suggest that we will trade above yesterday's highs and once again, the gap from 124-06+ to 124-08 will be key with 124-07+ as perhaps the single most important print. A trade below 123-15 would likely precede a move back to the low 123's which would need to hold, otherwise new lows of the most recent move would likely occur and that could be problematic, especially with regards to the 30-year. 3/30/09 - 9:00 a.m. - Although the 10-year futures doubled topped between early Friday morning and just around noon time, the cash 10's made a clear new high of the rally in the noon hour and at least there, the rally from Wednesday's lows appears to be a 5 wave move, which can prove to be a good start for a larger move. The price I wanted to see hold, 123-06, was taken out by 2 ticks later in the day on Friday but that level was only a 'must-hold' level for any 4th wave pullback so given the 5-wave structure of the preceding rally basis cash, that 123-04 print became a 'non-factor'. A weakening stock market overnight has lent a bid to bonds and the 10's are knocking on the door of the first real resistance in the gap left from 3/24 at 124-06+/08. In addition to the obvious resistance created from the gap, now if you measure the initial rally off of the 3/25 lows and add it to the low on Friday afternoon, we get as a 'wave equality' target, 124-07+, right in the middle of the gap, thereby enhancing the resistance there. This area must be respected for its' potential to turn the market back and at the same time, if overcome, that would be a strong indication that the next level of importance, 125-00ish, will be forthcoming and probably quickly. There seems to be little doubt that the strength in bonds is a direct result of the weakening in stocks so if the selling there continues, we could easily see the secondary resistance reached in 10's in front of Friday's jobs data. If so, that may be all that we can hope for prior to that release absent a really ugly equity market. For now, since I felt that the stocks were overdue for a pull-back, I'm not at all surprised at this break. It is way too soon, however, to determine if we are correcting the initial rally, or rather heading back down towards the bottom. While the initial preferred count I embraced for the stock market was negated when the SPX exceeded 804, the two favored remaining counts both end the same way - with new lows below those of early March, so we want to keep a close eye on those markets for signs that the decline may or may not be gaining momentum. The SPX, currently trading near 795 coming off of trades above 830 on Thursday, can probably withstand a move back to the 750's before it will look to most like it is headed back to the bottom so for now, it is just too soon to give up on a further rally. You can see a more in depth view of my preferred counts here. Finally, back on March 23rd, the day that stocks made their biggest move up off the current lows, the 4th best day for stocks in modern times, the Treasury and Federal Reserve issued a largely unreported, joint news release. It basically said that 'while those two entities collaborated with each other to preserve financial stability, it was the job of the Fed, alone, to maintain stability of consumer prices'. The short interpretation of that statement seems to be a warning that once the Fed sees signs of economic stability, a tightening of interest rates to prevent inflation may not be far behind regardless of any potential political pressure for them to do otherwise. At another time, that message might have made a great deal of noise in financial markets and while this time it didn't, the implications cannot be ignored. If the economy does show any signs of life in the foreseeable future, then the notion that this rally in treasuries is a corrective rally within the confines of a declining market, may prove accurate. 3/27/09 - 9:00 a.m. - Finally a rally - and not a moment too soon. The intermediate support tested yesterday morning in the 10's managed to hold into the auction and it was then that the market finally found a bid and began to rally. As we mentioned yesterday, those lows represent retracements of about 62% in the 10's, leaving open the door for a friendly interpretation of the decline, however, the failure of that market to show any response to several solid levels of support above there, and the fact that the 30's retraced 85% of their rally, still leans us in the direction of believing the highs from March 18 will now hold for a longer period of time than what we first felt - and very possibly represent the top of an A-wave from which a multi week, if not month long trading range could develop. So long as the 10's don't trade back below 123-06+, yesterday's lows at 122-26 may well prove to be a launching pad for a move back up through much of the recent break. The volatility in the Treasury markets of late has been nothing short of astonishing and certainly hasn't made the job of analyzing them any easier. And looking at the longer-term charts, there remain several potential wave counts that we could still embrace as our preferred count going forward so for now, we choose to work on the theory that the shorter-term patterns will lead us to the correct longer-term pattern. The first area that should give the 10's any real problems will be in the area of the gap left earlier in the week at 124-06+/08 and beyond that, right up against 125 with, as we mentioned before, 123-06+ the only bogey that needs to hold below. There is some minor timing associated with Tuesday of next week and if we can't hold the 123-06+ area today, that would likely stem the decline for now and at the same time, should we rally into Tuesday, a reversal from one of the above mentioned resistance areas would need to be respected. It's still too soon to label the rally that began yesterday as a 3 or a 5 so we just need to give the patterns a little time to develop. For now, we are guardedly optimistic about the prospects for an improving market for a while and one that can see the 125 area without too much trouble, but those really intriguing targets in the mid 126's, the ones we felt we could see end the initial rally, now seem more and more likely to be our targets for the secondary rally. 3/26/09 - 9:00 a.m. - It is getting exceedingly difficult to paint a near-term bullish picture in the bond market after what it has done over the past several days. Curve adjustments have played havoc with the charts as the most recent decline had been led by the long end of the curve and then, as if in an unwinding of that trade during the sharp rally on Tuesday afternoon, the 30's far outpaced the shorter maturities. Yesterday was just a down day but the long end held up much better than did the intermediates, never getting back to Tuesday's lows. The10's, however, broke through Tuesday's worst levels by more than half a point and cash took out what we felt was the last level likely to support a near-term rally to new highs. At this point, we are left to believe that the first phase of this rally has ended and while a rally from what are becoming oversold conditions may be likely, it seems more and more doubtful that we will be seeing new highs of the move without more time for consolidation. The cash 10's have now given back about 60% of their gains from the February yield crest and about 64% of the FOMC burst on 3/18. That alone would be acceptable for most of the wave theory but the inability to hold meaningful support makes any bullish interpretation suspect. Not to be misunderstood, we still believe that the March lows can hold for a much longer period of time, based mostly on the timing for them and what remains a reasonably constructive wave pattern coupled with the fact that the preceding decline lasted 3 months. We are just not optimistic that new highs will be seen near-term. A large trading range developing from those 3/18 highs, likely to be labeled a B-wave, seems like a better call and we may well be near the lower end of that range. We are currently holding intermediate support at 122-24+/27+ in futures and while cash momentarily broke through the equivalent near 2.81, it quickly recovered so maybe this area can hold but even if it does, I suspect that we will be looking at more of a 2-sided market for the immediate future. And we don't want to ignore the possibility that those March 18th lows won't hold. Should the 30's trade through 3.85, there is nothing to suggest the 10's won't make it back to 3.07. If at any time, the 10's break below their next intermediate support, don't trust them! The MBS charts, while reflecting a softening market no doubt tied to increased supply from the origination burst of late, still look very constructive. While simply trading sideways since late last year, that comes after a strong rally into the top in December so everything from December forward still looks corrective. A not so well received auction has been
blamed for much of the selling yesterday which is a strange thing to
blame weakness on considering that the Fed has pledged to buy enough
Treasuries to off-set any near-term lack of participation in an auction
but with the news that Britain just held a 'failed auction' in
which the total amount of bids received was less than the supply
offered, news of weak demand for Treasuries may have been
more un-nerving that it might otherwise have been. Stocks continue to improve and impress, but with still too many potential wave counts to zero in one for a preferred, we will just be watching the action there for signs of a near-term top. One thing that wave theory can't explain, is how that market would bottom with a 3-wave move from January so for now, we expect this rally to prove to be corrective. 3/25/09 - 9:00 a.m. - The volatility in the Treasury markets is picking up dramatically and seemingly unrelated to what has become a relatively quieter stock market. Following downside gaps yesterday morning and sustained selling pressure well into the afternoon, the fixed income markets caught fire, apparently on news that the Fed was to begin its' already, well publicized program of purchasing treasury securities. Not unlike what happened last week when the initial announcement was made, the markets had ignored all reports that the Fed might make such a move and were on the ropes when the news apparently caught shorts by surprise. The real fireworks came from the 30-year, which on the opening had printed a 3.846, representing an 85% retracement of the explosion from last Wednesday, only to rally nearly 20bps in half an hour upon news that the Fed might actually be buying that product. That was nearly a 3 point rally in futures but by this morning, they have given back nearly 80% of that rally leaving those charts a mess. The 10's were at least a little more subdued as they only managed to rally nearly 3/4's of a point yesterday but they have given back the entire rally and then some this morning. This is probably a good time to step back and give at least the very short-term patterns time enough to develop and hopefully give us a heads-up on the next swing. I had approached yesterday with the
idea that I wasn't going to trust any rallies that didn't originate
from one of my 2, intermediate support areas in the 10's; the first
being 123-23/25+ and the second at 123-14/16. Additionally, if the 10's
couldn't attract buyers from one of those 2 levels, then we might need
to re-think the call for a still higher high than the one established
last week before we were likely to finish off the first rally. What we
have seen is a little bit of everything as the markets first tried to
hold the higher of the two supports but failed, and then went straight
to the second. There, that 123-14 held to the tick and an
hour after the initial print, the upside blast occurred and at least
for the moment, the support had done its' job. This morning, however,
it has given way, even if only for a brief moment, and now we just have
to wait and see what transpires. Any new lows in futures will be very
suspicious and if the cash 10's cannot hold their last good support in
this area at 2.772, then the probabilities of a move back through last
weeks highs in the near term will take a serious hit from our
perspective; probabilities that have already gone considerably south. I
also mentioned yesterday that this downside correction needed to
complete no later than the very first part of next week, so from a
timing perspective the patterns remain intact, but the price action
cannot be ignored. For now, I doubt very seriously that last weeks
highs will prove to be the top of the entire rally, but rather I am
moving closer to the idea that they may hold for several weeks or more
in what can prove to be a more normal downside correction of that
first, very abnormal, explosive rally from last week. News that the MBA Index of Mortgage Applications jumped 32% last week may have contributed to some weakness in that product but the truth is that right now, any widening or tightening of spreads is probably more a function of the crazy price swings in treasuries than of anyone's opinion of how the spreads should be acting. We continue to look for a stable to strong market for mbs product. Stocks are flashing some signs of impending weakness and there are just too many potential wave placements at the moment for me to make a confident call there. I see the lows as bing the product of a 3-wave decline from the January highs. That means that they could be the B-wave of an ABC that began in November, or an X-wave from the January highs. In the case of the former we would look for a 5-wave advance while the latter would call for 3. Just can't yet tell. One thing that the wave theory seems to be saying clearly is that the lows at 666 are not the bottom.As far as bonds go, I'm leaning strongly in the direction of last week's highs being the top of an A-wave off the lows and the B-wave could be a fairly protracted event. I will force the cash to trade through 2.772 before all but giving up on the notion for one more new high first. 3/24/09 - 9:00 a.m. - If
there was one thing that the charts told us yesterday morning that
proved to be spot on, it was the notion that by virtue of how high the
SPX had traded overnight on Sunday, 'the decline from Wednesday's highs
had been corrective' suggesting at least another leg to the upside.
Following several attempts at the previous highs in the 803 area, at
about 3:00 p.m. that area gave way and a quick 17 points followed. Most
of the pundits laid credit for the 50+ point SPX explosion at the feet
of the new Troubled Asset Relief plan and while that was not doubt the
catalyst for much of yesterday's buying, most neglected to mention that
the 57 points added to the S&P, were on top of nearly 100 points
already gained since 3/06. While the fixed income markets struggled a
bit yesterday, they've gapped down today and the 10's seem to be headed
for a date with at least the first good support numbers we can find at
123-23/25+. We would expect to see buying enter the markets in that
area or at the very worst, at 123-14/16, otherwise the notion that we
need to improve further to polish off what we suspect will be the
first of 2 corrective rallies may shift to the back burner. While the
10's have now given back nearly 50% of the post FOMC explosion, at the
opening this morning, the 30-year treasuries had actually retraced a
remarkable 85% of the rally raising a question as to whether or not the
long end of the market will actually hold on to the lows established
last Wednesday morning when the timing for a significant low was so
perfect. We think a failure to do so would prove to be a very bearish
signal for the longer-term health of any of the treasury markets out
more than 5 years on the curve.
While the long bond seems to be in a fight for its' life, we still
suspect the 10's will find their footing for another rally but if they
cannot do so by late this week or early next, then the evidence will
mount that the first leg up will be complete and the correction
following that rally could last for a while. Still, there should
be a secondary rally and until the futures trade below 122 and
the cash through a 2.82, we will continue to expect one to eventually
develop. We would, however, be pretty dismayed if the long bond cannot
hold last week's lows despite the fact that it is in a world of its'
own. 3/23/09 - 9:00 a.m. - Not
surprisingly, Friday was one of the slowest volume and smallest range
days of the year, as it appeared that most traders were busy licking
their wounds. The Treasury markets all backed up a little but none made
it back to anything we could label as reasonable support and we suspect
that pattern could continue into this week, but sometime soon
we would look for a probe to new highs above those established
during the explosions on Wednesday - and we are still looking to
sell aggressively into any rallies that carry the 10-year into the
mid 126's. 3/20/09 - 9:00 a.m. - Following the unprecedented moves made by the Treasury markets on Wednesday, little can be read into what they did yesterday. Whether this rally proves to a corrective one - our preferred count at this time - or whether the efforts by the Fed produce another run to new highs, one thing that shouldn't happen is that the move should not happen all at once. If we are indeed in a corrective rally, then it should take the eventual form of an ABC or 3-wave move and it should not go back to the December highs. Given that the 10's recovered 58% of all ground lost since December on the initial burst on Wednesday, it would seem logical that we've seen the bulk of the first rally and that the upside potential from here over the intermediate term, is limited. So far, the 10's have rallied the equivalent of 56 bps and one could anticipate a 20-25 bp correction in just about any scenario. There may still be some upside extension of the rally but as we pointed out yesterday, there is great resistance in the 10's in the 126 handle and if we haven't yet seen the top of the first rally, then that is where we suspect it will occur. If we can trust the wave patterns on the charts of MBS, then they have likely begin an impulse wave from the lows of mid-February and the highs seen on Wednesday were likely only the top of 'wave 3 of wave 3'. That would suggest another new high would be seen by early next week, followed by a correction that could last a week or so, followed by another rally to still higher highs before this phase of the rally is over. That is pretty much the same path the 5-year looks to be taking so for now, while the excitement has waned, there should still be higher prices in everything, although the patient traders are likely looking for lower levels at which to re-enter the markets. What may prove important going forward is the fact that with the explosive move on Wednesday in bonds, the Dollar got hammered and many commodity prices had very nice rallies. While Oil didn't exactly explode, it has been in the process of producing what appears to be a nice base of late and having fallen more than $100/barrel from its' top, there is plenty of room for that market to move up. The point being that most markets that we have looked at, from stocks to the dollar and to commodities are, at the very least, showing the first signs of a potential change of direction from whatever trend has had a grip on them and as far as we can tell, that cannot be a bad thing. Finally, the Fed is kicking of its' TALF program which will provide funds to virtually any entity that is willing to purchase consumer debt-backed securities. This is an all-together new approach to bringing liquidity to the markets and we imagine one that will have some beneficial effect. It's one thing to prop up a flailing company and quite another to help one initiate new business. This program should help create a market for consumer loans above and beyond what would otherwise be there. Absent a meltdown in stocks, we would not expect anything too remarkable to happen in fixed income today but by next week, we would begin to look for a low from which we could launch a rally into the 126 handle. The only solid support we see in 10's begins in the upper 123's. 3/19/09 - 9:00 p.m. - We'll leave the bulk of the news reporting to someone else but suffice it to say that the Fed, rather than announcing they would step up their purchases of Treasuries, or MBS, or Consumer Debt or anything else, choose rather to announce they would step up their purchases of all of the above. The biggest reaction came for the Treasuries which, for reasons we never fully understood, had managed to post new lows of the move just yesterday morning on the long end and the degree to which they exploded leaves one to assume that there were still many shorts left in those markets. The 10-year, with a 56 bp explosion in less than 20 minutes, managed to recover 58% of all of its' losses since the December top - 65% in the 5-year - and even despite some profit taking late, they've managed to retain most of their gains. The same can't be said for the 30-year, the one market that seemed to have completed a clear 5-wave bear market leg yesterday morning. Following a 43 bp sky-rocket, the 30's gave back more than 60% of the move when the Fed clarified their definition of 'long-dated Treasuries' to mean that they would be focused on the 2-10 year maturity range. At the end of the day, while the 10-year had but one logical resistance target left - the 62% retracement level - before most technicians will be talking about the 2.03 yield trough from December, the 30's were right back in the middle of the range that they had been in since the 9th of February. So what does all this mean? The short end of the Treasury curve, as
defined by anything inside of the 10-year, has never looked
bearish and should see new low yields. The 30-year, having likely
completed a 5-wave yield rally at yesterday's yield crest, is likely
going to experience a strong, counter-trend rally that could last
months, but one that should not challenge their December highs. The
10's are tougher to call since they never completed a 5-wave move from
the top as their February lows were never taken out.
Still, traditionally they trade more like a 30-year than like a
5-year so we will just have to be more cautious with our longer-term
call for them. As everyone who reads these reports knows by now, the
timing for a major trend change this week was just perfect with the
smallest move generated in 7 of the past 8 years in which the timing
has worked, being 90 bps in the 10's. We should not only see better
levels ahead, but we should hold these lows for a reasonable amount of
time. That said, there are some levels not far ahead that we need to
stay focused on as much of the projected gains that the market felt
these moves by the Fed would generate, were factored in
immediately. The first of these areas is 126-09+/13, which comes to us from 4 different angles, 3 being Fibonacci extensions from the lows back in February. The other is 126-21+/26 and that one comes from 4 Fib extensions dating not only back to the February lows, but one even dates back to the lows in June of 2008. Additionally, this area includes the life of contract high. Finally, 2.428 represents a 62% retracement of the entire run-up in yields since December and that level looks to be about consistent with the 126-21 area. Shorts against these levels could prove rewarding but a stop just above each is imperative. The MBS markets experienced moves of more than a point in most coupons and they appear to be headed higher in concert with the shorter end of the Treasury curve. All seems well there for some time to come. The explosion in bonds carried stocks with it as the SPX traded to 803 while the level we couldn't tolerate exceeding without adjusting our wave count was 804.47. The Dow left plenty of room as its' equivalent is at 7909 but believing that the SPX is a better proxy for the entire market, any new highs above yesterday's in the SPX would cause us to re-think our opinion on stocks. For those of you who care, the Nasdaq is clearly projecting higher prices already. All told, the Fed has made it perfectly clear they will use every weapon available to them to re-ignite the economy through economic stimulus and they are determined to drive down interest rates everywhere. By most measures, their intended purchases of Treasuries for the remainder of the year will exceed their projected sale of 10's and 30' through auctions by a factor of 2. Makes you wonder why they don't just stop selling them. At any rate, the bear seems to be dead - for now - but until proved wrong, we will move forward believing that the long end of the curve finished the first of at least 2 major bear market legs yesterday and by mid-summer, we could be looking for another trend change - but in a different direction. 3/18/09 - 4:25 p.m. - The news is out and it is good for everybody; stocks are up and bonds, well they just plain exploded. The 10-year, in less than 20 minutes, recovered 58% of all the ground lost since the December yield trough and for the record, the 5-year recovered 65% of all its' losses. So much was recovered so quickly that it begs the question 'are we really to believe that we are not going back to the top?'. Well, for now, we doubt it and as far as the shorter end of the curve goes, the 5's never have looked bearish and the 10's typically trade more like 30's than like 5's. As for the long end, the 30-year produced that final new high yield shortly after the opening in what looked to be a 5th wave wedge pattern from March 6th (see hourly chart), completing a 5-wave move from December (see daily chart) and as far as we're concerned, it looks like we have finished the first of what should prove to be at the very least, 2 yield rallies with eventual targets well above the 3.85 posted this morning. The wave pattern works perfect and the timing couldn't have been better. While the 10's may have recovered more than 50% of the bear market since December, the 30's gave back 65% of the post announcement rally before finally stabilizing well within the trading range that had them captured for the past 6 weeks. Typically, looking for support and resistance following a move like today - actually a move like todays is pretty hard to find - is challenging but 2 levels not far above in the 10-year beg to be watched closely. The first is 126-09+/13, an area which comes to me from 4 different angles, 3 being Fibonacci extensions. The other is 126-21+/26 and that one comes from 4 Fib. extensions as well as including the life of contract high. Additionally, 2.428 represents a 62% retracement of the entire run-up in yields since December and that level looks to be about consistent with the 126-21 area. Shorts against these levels could prove rewarding but stops just above each is imperative. For now, the bottom should be in for a while, but I'm viewing this as a bear market rally until proved wrong. 3/18/09 - 9:25 a.m. - Speculation about just what to expect from the FOMC continues to dominate the news and most centers on what are considered to be the 3 'best guess' alternatives. One being that they can follow the lead of the Bank of England (they began purchasing U.K. Government bonds in an apparent successful attempt to drive down interest rates) by purchasing Treasuries, another being that they can step up their purchase of Mortgages and a third being that they might increase the TALF program in an effort to restore consumer and business lending. It has been reported that 3 of the 17 voting members favor the purchase of Treasuries which could explain why they have come under so much pressure of late given that the 'cup half empty' side of that is that 14 of 17 apparently don't favor that idea. At any rate, the news, scheduled for release at 2:15, can have a significant impact on not just the level of interest rates but in particular, spreads. We mentioned yesterday that for everything to look the most compelling for a bottom, we wanted to see the 30-year make another new low even if it seemed that the 10's may have a hard time duplicating that feat. This morning, the cash 30's did just that and so far, the high yield of 3.846, is barely into the huge gap left on 11/20 and just short of a targeted price for a 5th wave wedge from 3/6, to complete. That doesn't mean that these lows are going to hold, but each day the evidence seems to mount that a recovery from this prime-timed week, could materialize. That gap from 11/20 is enormous and has certainly been noticed by more than just us and let's not forget that while we love support generated by the beginning of a gap, a bounce from that area in no way insures that a complete filling of a gap will not be forthcoming. The setup, however, is certainly there and if the 2:15 news is favorable to the long end of the Treasury curve, then we could develop a nice technical picture from which to gain some footing. None of our other charts are nearly as compelling since the 10's, as well as the mortgage-backs, are just bouncing around in a trading range with no real clues as to which way they will resolve the pattern. The wave work, of course, has not changed and it continues to suggest that we have been in a correction since 2/09, implying that we still need to see a break to new lows but with the timing for this week, and the potentially important news coming later today, coupled with the pattern in the 30-year, there is an increased possibility that we are making some sort of low. We'll let the markets tell us what they have in store, hopefully by late today. Stocks recovered nicely from their resistance-targeted failure of 2 days ago by posting an outside up day yesterday. We mentioned on Friday that resistance in the S&P began at 770, and extended to about 790, with 805 the level that, if exceeded, would eliminate the 'need' for a new low soon to complete the leg down that began in January. That remains our best call for now. Yesterday's high in the Dow as at 7397 while the 50% retracement of the decline from the January high was at 7393. Next problem area there should be at 7607/7610 with 7909 'the number to beat' if that indices is to suggest that a decent low may be in place.We highly recommend squaring up on positions as we head into the 2:15 announcement as the impact to just mortgages can be substantial. 3/17/09 - 9:25 a.m. - If you read the market news this morning, all eyes seem to be shifting to the FOMC meeting tomorrow with the focus on the notion that the Fed needs to increase its' balance sheet by stepping up the purchase of Mortgage Backs, Treasuries and other assets. Further deterioration in economic conditions warrant increased buying of assets or at least that is what several articles published over the past 2 days are suggesting, especially after their balance sheet shrank 17% since they last met in December. That is what the news articles are suggesting but as the meeting approaches, the markets don't seem to be paying too much attention. This mornings PPI headline number was friendly, the Core number a little unfriendly while Housing Starts and Building Permits came in much stronger than market estimates and yet there has been little in the way of price movement of fixed income securities (it should be noted that the bulk of the Housing Starts were in multi-family). The long end of the curve is improving a bit but it took the brunt of the damage yesterday, while the 10's remain pretty quiet. Fixed income markets have been featureless from when we wrote yesterday's report, at which time the 30-year had produced a clean break of the worst levels seen during the now 3+ month long decline while the 10's remained well within their month long trading range. Based on patterns, we suspect there will still be at least a little more downside as the 30's need to make another new low in order for their suspected 5th wave, which began on March 6th, to complete. Of course, if the 10's are going to 'confirm' that 5th wave, they would need to break above 3.05 but at this point, the timing for a market turn and the fact that the 30's have reached a new low of the move makes waiting for 'confirmation' by the 10's a little more un-nerving. Having for weeks now, mentioned the timing for this week in bonds, we thought it worth mentioning just why we continue to bring it up. In 7 of the past 8 years, the 10-year has moved anywhere from 90 to 190 basis points from a swing high or low during this time frame and those moves have been virtually un-interrupted and from significant highs or lows when viewed even on weekly charts. Only 2006 didn't produce an obvious swing high or low during that time frame and even then, the market did move 60 bps from a minor swing. This timing is just too compelling to ignore. See Chart. FNMA 5's, like the 10-year, are still pretty much trading within a range although there, since January they have continued to produce higher highs and higher lows even if they are still near the middle of the range. So today should see some squaring up of positions in fixed income as the notion of the Fed being outright buyers of any security, should keep sellers of them at bay. If they don't give the market aggressive enough language with regards to stepped up purchases, we may see the further new lows we are looking for but even if we do, we would expect a reversal back to the upside and very soon. And let's not forget about stocks all together. As if on queue, the S&P backed away from the first resistance we could find at 770; the actual high on the front month contract being 771.5 while cash hit 774. We have just entered the second week of what figured to be a 2-3 week rally so weakness could materialize from here but it is too early to call yesterday a top just as it is still too early to dismiss the 666 print from 2 weeks ago as potentially an important low, even if not a bottom. The next week or so should give us all the clues we need. 3/16/09 - 9:20 a.m. - The number of price swings since the low on 2/09 - just 24 trading days ago - that have exceeded a full point in the 10-year, now stands at 19 and yet, at least in the case of the 10's, we remain in the trading range established in the first 5 days following that low. We've continued to focus on a possible triangle pattern, which as of last week, we felt had the potential for 2 more prices swings with about an equal chance that it had completed. Once completed, it should give way to new lows of the move. In looking at the pattern over the weekend, we must concede that it could actually draw out a little longer and still need 2 more swings but not to be ignored this morning, is that fact that the 30-year has gapped down and produced the highest yields seen since 11/20. This would suggest, of course, that the correction that began on 2/9, is complete with regards to the long end of the curve and as far as we're concerned, the count on the 10's and 30's, while occasionally in conflict over the short-term, will seldom deviate much over the longer-term. The burden is squarely on the 10-year to mount a recovery quickly if it is not going to follow the 30's to new lows of the move, still nearly 10 bps away.The implications for the 30-year's burst to new lows of the move this morning are unmistakable; they appear to confirmed that the entire move from the all-time top in December is a 5-wave move and that would mean that any chance at making a return visit to those levels is highly unlikely; or at least not likely to occur before we experience a corrective rally followed by another major sell-off. That isn't all together bad news as it could suggest that a recovery is actually in the making but for now, we're focused on the markets and as of today, they 30's are making a statement that they haven't made in a while. While we would like to see some sort of confirmation from the 10-year, just as important to us will be whether or not the 30's can reverse from very near current levels. For now, this most recent leg that has produced these new lows began on 3/6 and is currently just a 3-wave affair, not the 5-wave structure one would need to see to be able to label it a 5th wave, but with or without the perfect internal wave structure, these new high yields just cannot be taken lightly. Also worth repeating is the fact that we have now entered the 'perfect' week for a trend-change in fixed income. This timing could extend for another week - and of course it could prove inconsequential - but we are going to stay on high alert for a bottom of this leg sometime this week or next and one that should produce the biggest rally fixed income has seen this year - even if the probabilities of a return to the old highs has become highly unlikely. The sell-off in fixed income has come consistent with a powerful rally in stocks but one that is only now reaching into its' first resistance targets. We had defined 770 as the beginning of resistance in the SPX in Friday's report when that index was trading near 730 and overnight, it has touched 769 so the progress from here may be impeded. We are also now entering the second week of what we felt would be a 2-3 week rally that would then give way to one more round of new lows so if all goes according to plan - something that rarely happens - then that too would help bonds come out of this hole. The bottom line here is that these new lows that have been established in the 30's and may very well be duplicated in the 10's, may change the long-term patterns, but not in a way that we weren't expecting. The handwriting has been on the wall for a while now that the month-long trading range in treasuries was a correction that would likely give way to new lows and now it has, in the longest dated securities. 3/13/09 - 9:20 a.m. - Any lingering doubts as to what caused the big rally on Wednesday were erased yesterday when at precisely the same time, 1:00 auction time, the treasury market took off again. Though not quite as spectacular as the day before, the 10's still managed to trade nearly a point higher on the day when the results of the auction were released showing good demand for the 30-year bonds, especially from the 'indirect bidders' - the group that includes foreign buyers. The difference, however, was evident less than half an hour later when the market began to come off nearly as fast as it had rallied and this morning, the weakening continued until we were more than a point off the highs. The story that seems to be most responsible for the weakness flys in the face of the one that caused most of the strength. After stepping up to the plate and buying our bonds, Chinese Premier Wen Jiabao said that 'he is concerned about the safety of U.S. debt and wants more assurances that the U.S. will maintain good credit to protect the value of the money they have lent us. So much for the good auction results. So with all that news and volatility behind us, what do the charts look like now? For the most part they look like they did heading into Wednesday. The potential triangle is alive and well in the 10-year - even if by the skin of its' teeth - as yesterdays 1:00 spike stopped just short of where we would have had to abandon it. We had mentioned that a trade above 122-08 would be a concern but the only price that 'couldn't be breached' was the previous high from 3/06 which while at 122-12 on an intra-day chart, was at 122-15 on the daily which included the overnight session. Yesterday's high was 122-13. In cash, we needed to see 2.828 hold and while the low yield was at 2.821, we can deal with that. We can quibble about 'near-hits' or 'near-misses' but what is more important to us, is the structure of the rally from the lows on Wednesday. The high on Wednesday was at 121-20, so following the second rally, having now traded below that level pretty much insures that the entire rally was a 3-wave move, the required structure for all legs within a triangle, leaving us in one of 2 placements in the suspected pattern. We are either headed down to the original target for what is likely the D-wave - the second to last leg - in the mid-119's, otherwise the pattern has completed and we are headed to new lows. The futures make the former seem like the best count while the cash seems to suggest the latter. We all know that anything can happen in these markets but we're going on the same assumptions today, that we have been for most of the week. New lows are headed our way and the timing for them is getting closer and closer. Next week not only fits the pattern well, but is the very week that we have eluded to for some time now as having great timing implications for a change of trend. We need to stay on our toes with regards to avoiding what could prove to be a hard break down, as well as a low that could hold for quite some time. Stocks continue their unlikely march upwards from the lows established a week ago. Our best targets in the SPX begin at about 770, and extend to about 795 with 805 the number that seems to eliminate the pattern which called for the rally to last 2-3 weeks before giving way to one more new low. Should we trade above 805, while we would not yet be screaming 'bottom', that 666 print from a week ago could remain intact for quite some time. 3/12/09 - 9:30 - You can always find a story somewhere
that explains 'what just happened' but a good explanation for the explosive
rally off the lows in bonds yesterday is pretty elusive. The timing of it
suggests it was related to a well subscribed auction but the magnitude makes
one wonder why the 10's would have run a point and a quarter - the 30's 2
full points - in less than 90 minutes and only after trading below the bottom
of their gaps, the best and most obvious support on the charts when the day
began. Perhaps just too many shorts but whatever the case, it was quite a
pop. And to complicate the frustration on our part, the low tick in the 10's
ended up right on our next support below the bottom of the gap at 120-12+,
although we viewed that as only minor support. So be it as that was yesterday.
Our take going in was that while a break below the gap suggested more weakness
than we cared to see while maintaining any long exposure, our preferred wave
count that had the 10's in a triangle from the February 9th lows remains
intact, although the 30-year looks to be in a different pattern but one that
should produce the same outcome. As far as the 10-year goes, each of
the 3 major swings since the bottom, prior to the down-leg that began on Friday
have been composed of 3 legs - the textbook makeup of a triangle. Despite
the magnitude of yesterday's move, it may well prove to be the 'counter-trend'
rally within the most recent downward move since the low of the day in futures
just wasn't low enough to allow us to label it as the bottom of a D-wave within
the triangle, the only logical location. The cash market actually traded a bit
though its' ideal triangle target so maybe the blend of the 2 proves to be the
way we should have looked at it. A trade above 122-08 in futures and through
2.828 in cash would cause us to re-think the triangle altogether but for now,
we still look for another push down into the 119's and still, potentially, one
more rally. The 30-year basically tested the upper end of the entire range
yesterday with the cash actually trading to a new high yield by less than a bp,
making the pattern there look more like a flat correction but regardless of
whether one calls it a flat or a triangle, both markets appear to be correcting
from the lows of early February with new lows still likely and likely very
soon. Not much can be said for the pattern in
mortgage backs as the FNMA 5's, after a significant failure from the best
levels seen since early January, on Tuesday, and a terrible downside gap
yesterday morning, recovered nicely and remain well within their recent trading
range. The jury remains out on the equity
markets, which we feel are about to experience a multi-week rally but still, we
need more time to determine if that rally actually began last week. That 666
SPX low price makes us feel as though it did but ‘Rome wasn't built in a
day’. 3/11/09 - 9:20 a.m. The early weakness in the treasury markets yesterday persisted all day long, eventually pushing the 10-year to within just a few ticks of the bottom of the gap left from 3/05. The 30’s held up a little better, but this morning, the markets are under pressure again and with some curve steepening, the long end is catching up with the 10’s as both market seem to have made up their mind to fill those gaps. The 10’s have already done so and with a wave-equality target at 120-23 already broken, all that remains is a final minor Fibonacci target at 120-18+ before it will seem probable that we are either heading into the mid 119’s to complete the D-wave of the suspected triangle, otherwise a break down to, and possibly well through, the lows of the move at 119-06 may be in the cards sooner rather than later. We’d prefer not to have any long exposure to the markets if they can’t hold the 120-18 level and make them prove that this break, like the all that have preceded it since the first rally out of the 2/9 bottom, will be contained within the now, 5-week old trading range. Of course, by now we all know the ‘good news’ that has certainly contributed to the weakening treasury market and that of course is the blistering rally in stocks that commenced from the opening yesterday and persisted overnight. The S&P, which posted a low of 666 on Friday, has traded as high as 730 this morning in what now stands as the largest rally since the beginning of February. The signs were there in equities as bullish divergences had developed in multiple indicators including the A/D line and TRIN, not to mention what has appeared for a while now to be a developing 5th wave decline in stocks from the January highs. If this is indeed a 4th wave correction, the likely wave placement based on even elementary wave analysis, then it should last 2-4 weeks and be followed by a lower low that may very well end the decline for quite some time. While nothing is ever a certainty with regards to market forecasting, the idea of a rally from very near here in stocks seems like a very solid call even in the more bearish of longer-term scenarios. With all of the financial stimulus being heaved at the global markets, it seemed only a matter of time before that nasty word, inflation, would work its’ way back into the vocabulary of analyist and it has; now from the likes of Warren Buffet, Marc Faber and the boys at Pimco. We never thought we’d say this but at this point, the mentioning of inflation actually comes as somewhat of a relief as at least now, not everyone is screaming ‘deflation’. As of yesterday, the FNMA 5’s had managed to work their way up 2+ points from their worst levels of the year but this morning, they too are giving up significant ground. Finally, and we don’t mean to repeat the same thing over and over again, but there is a compelling case to be made for a significant trend-change for the fixed income markets in the next 2 weeks. A continued rally in stocks, accompanied by a continued weakening treasury market that produced new lows of the move, could give us a setup for a well-time bottom, and strong rally in fixed income. We continue to believe that the longer-term prognosis of fixed income will worsen significantly if the 10’s cannot hold 3.09.3/10/09 -We’ve gotten the weakening in the Treasuries that we were looking for – and then some. While having not yet broken critical support, yesterday the 10’s broke their 50% retracement level of their most recent rally at 121-06+, and today they have traded into the gap left on March 5th. Completely filling the gap by trading at 120-20+, is about as far as we are willing to watch this market trade on the downside, without assuming it is not making an all-out assault on the lows from 2/09 at 119-06 on the current contract - about 3.05 in cash. A move back to those lows – and eventually through them - seems more and more inevitable with each passing day and each swing up and down within the trading range that has been in place now since early February and while the timing for that break is still unclear, it shouldn’t be too far off. The potential triangle that we have mentioned in several previous updates, remains intact and if that is the correct count, then this break, like the 5 or so that have preceded it, will not reach the lows at 119-06, or even the secondary lows at 14+. Rather, if this is indeed a triangle – still a preferred count - then we would expect this break to hold in the high 119’s followed by one more rally without a clear target yet but certainly one that is below 122-08. From there, new lows would likely be seen. For now, the worry is that we don’t hold the gap for as we mentioned above, a break to – and through – the lows seems to be in the cards sooner or later and we want to avoid getting caught in what could be a substantial down-draft. The stocks
continue to trade heavy but still, from our work, likely about to rally. If the
wave patterns continue to develop the way they have of late, then there should
be one ‘false start’ followed by a lower low, before the real corrective rally
commences and that ‘false start’ or likely 4th wave, may have begun
2 days ago with that lovely 666 low in the SPX. It should last several weeks
once it begins. Too soon to tell for sure but as we have been reporting, there
are some divergent signs being flashed from a variety of indicators and
sentiment couldn’t be much worse. In a perfect
world - perhaps in a galaxy far, far away - the bonds would trade to their
expect new low while the stocks would continue up in their expected first rally
and both would end next week or the week after, when the timing looks to be
best for a major trend change in fixed income. From there, when the stocks head
back to their wave based rendezvous with new lows, the fixed income might
finally find its’ footing and begin a real rally although as we have felt for
at least a month now, if that rally comes from anywhere beyond 3.09 – and
perhaps even if it doesn’t – we doubt that the December top will be tested
again. It would be nice to be in that perfect world now, wouldn’t it? 3/9/09 -We continue to view the pattern in the 10’s as likely a correction off of the 2/9 lows and, as we suggested in Friday’s update, absent an explosion from no lower than the bottom of the gap at 120-20+ - and preferably from the area of 122-06 – the best counts remain either a triangle with several price swings left to go before it is complete but with the best levels already having been seen, or a flat correction with upside targets near 123; the triangle still being our preferred count based on the wave structure of each of the price swings since the lows. If we are in the more friendly of the 2 potential counts, then a wave equality target in the 10’s at about 123-02 looks pretty good as does a 30-year target near 128-09. Those targets are up about 1 ¼ points in the 10’s and 1 ¾’s points in the 30’s and those are fairly consistent given the different maturities, should we burst to new highs. Not because of wave equality but rather using other means of defining support and resistance, the cash 10’s should find solid support near 2.60, should they make it that far, while the 30’s have for their 38% retracement of all that has happened since the December yield trough, 3.29; both of those levels being about 25 bps away. For now, however, some minor weakening can be expected as the short-term charts point to a return to at least, Friday’s lows at 121-14 in the 10’s, if not the lower targets we mentioned above. Stocks still
look to be in a 5th wave decline from the January highs but if you
trust the wave theory completely, then we are likely only at or near the bottom
of the 3rd wave of the bigger 5th. That would suggest
that following a false start that could last several weeks, a lower low should
be seen in equities. Some positive divergences are flashing in stocks from
measures like the A/D. the Commitment of Traders reports and the number of
issues making new lows so a case can be made that a low is developing, but with
no signs that it is in place. There is one thing about the current low of the
move that was established on Friday that we just can’t let go without
mentioning, however, and that is the price that held at the bottom; 666 – the
Devils number. A final note
comes from a development we see occurred last week. It seems that there were a
total of $10.4 billion in outflows from equity markets as well as $2.47 billion from fixed income markets with
the only asset class showing an increase being money markets, which grew by
$12.8. You don’t need to be a math major to see that the numbers add up and
continue to reflect fear on the part of investors who seem to still be
unwilling to take on risk in an effort to increase returns. 3/6/09- -Buy the rumor, sell the fact; an old adage that never seems to lose its’ punch. Following a run of nearly 2 ½ points in the 10’s just since Wednesday morning – more than 4 in the 30’s – the jobs report came out and despite the fact that it was clearly bullish, the markets backed away from highs achieved just prior to the release. To be clear, the NFP number for February was right on the screws, however, the previous 2 months job loss totals were revised up by 161,000 and that can’t be twisted as bearish for bonds by anyone, save perhaps those still focused on the massive supply which everyone already knows is coming our way. We mentioned in
yesterday’s update that we appeared to be in the C-wave rally of a correction
that began on 2/9, and that the 2 preferred wave counts we were embracing were
either a ‘flat correction with targets near the top of the range’, or ‘a
triangle which has already seen its’ extremes and would continue to narrow over
the next week or 2’. While either of those 2 patterns could still prove
correct, the triangle has moved to the forefront given the early action this
morning. Of course we would be remiss
if we didn’t concede that the wave theory doesn’t always work and that a
full-blown bull market could have re-started, however for now, that will remain
our third best guess. The evidence pointing to a triangle is supported by the
patterns in the 10-year cash and futures as well as the 30-year cash, all of
which have now made a series of lower highs and higher lows since the 2/09 bottom
– the textbook look of a triangle. Only the 30-year futures have distorted that
look by making new lows of the move last week but that is not enough to give us
cause to eliminate the triangle as a potential count. Additionally, each of the
5 waves within a triangle are composed of 3-wave moves and at today’s high, the
10’s printed just 2 ticks above their wave-equality target from the lows on the
26th. Now, absent a virtual price explosion from the 121 handle,
that entire move will almost certainly prove to be a 3-wave rally which would
eliminate both the ‘flat correction’ as well as the ‘bull market’ counts. Look
for support at the standard Fibonacci retracements of the rally that began on
Wednesday, which come in at 121-15, 121-06+ and 120-29+ and most importantly,
at the gap left yesterday morning which begins at 120-31+. While the support at
the gap may be powerful, if we cannot hold above 121-06+, any notion that we
are still impulsing up towards the top of the range or beyond, will seem
misplaced. The range of late has been so choppy and tricky to call, that embracing any count with too much conviction could prove to be a mistake, however, our job is to call these patterns as we see them and for now, the idea that we are triangulating from the February 9th low prior to posting one more new low looks very compelling. That pattern would also extend the trading range for another week or 2 and the timing for some sort of significant trend change around the 3rd week in March is equally compelling. More on that next week. 3/5/09 -Describing the recent action in bonds as being ‘like a roller coaster’ doesn’t really do it justice. In just the last 17 trading days – since the lows on 2/9 - the 10-year has had 10 price swings in excess of a point and 3/8ths. Seven of the 10 swings have exceeded 2 points. The center of the range is 121-01 and on only 2 of the 17 days in the nearly 4 point range, have the 10’s not traded above that mid-point while on just 4, have they not dipped below it. If you tried to figure out just where we might be in a wave count based on that sort of action – what we try to do every day – the conclusion you would reach would have to be ‘somewhere in a correction’ with most of the action resembling an ‘A’ or a ‘B-wave’. That is to say that we may now be headed up in a ‘C’ wave with one of 2 developing patterns still likely. Either we are building a ‘flat correction’ with current targets back near the top of the range which was at 2.62 in cash and 122-26 in futures, otherwise we are working on a triangle in which case we have seen both the highs and the lows of the range and we will continue to contract it through several more price swings before it ends. Either of those 2 patterns produces the same outcome once they are completed - a push to new lows - with the former being the more bearish of the 2. The most important thing to take from either of these two wave counts for the time being, is that a new trend, whether it be to new lows from the current highs of the range, or to new highs from the bottom of the range, is not likely to have begun - yet. The next most important thing to take from the counts is that we have not likely seen the lows of the move.Today’s opening
burst not only left a gap below us, but it left an island as well since the gap
up today was over the same price range as was the gap down yesterday. Gaps are
always a source of good support or resistance and islands are all the better.
That area should provide good support on any breaks while the 5 swing highs we
have experienced since the 2/9 lows, should all produce strong resistance. The
first of those comes in near 121-24. As has been the
case during most of the rallies of late, the weak stock market is likely
deserving of the credit. Following a nice recovery attempt yesterday, we are
back under 700 SPX and that seems to elicit fear every time it happens. Of all
the stories we’ve seen this morning trying to explain the weakness in stocks,
one that seems especially disturbing says that Moody’s has put the vast
majority of the CLO market on review for ratings cuts. The report says some may
be in the ‘4-notch’ category, which could move A-rated paper to the brink of
being non-investment grade, while others may be cut as much as 5-8 notches.
That would only go to exacerbate the current problem of deteriorating values of
assets being held by the very financial institutions already being stressed. 3/4/09 -Following Monday’s upside gaps and good closes, yesterday started out great and even with the late fade, the charts were still very constructive looking at days end. The fact that the SPX closed below 700 for the first time since September of 1996 no doubt helped retain somewhat of a bid to treasuries but as we feared and pointed to in yesterday’s update, given the feeble performance of bonds over the past several months while stocks were getting clobbered, it didn’t take much in the way of a recovery in the equity markets to steal the bid from fixed income. The top headline on Bloomberg.com early this morning stated that ‘Stocks Rise, Commodities Climb and Treasuries Fall’ and this accompanied a mere 12 point bounce in the S&P following a 90 point drop in just the past 4 days – nearly 200 since February 9th. There may still be a credit freeze but the ice on the treasury rink seems to be getting thinner and thinner. Part of the
reason that we expected the 10’s to work there way back up through most, if not
all of the recent trading range, was the lack of anything resembling an impulse
wave down from the top of that range and even with the weakness today, there is
still no good evidence of one. That would leave us to believe that we can still
see the upper reaches of that range, however, we have now given up so much of
the rally that began last week, that a probe down closer to the lows of 2/9
seems likely before the next rally attempt gets under way. If we do make
another test of those early February lows, remember that in cash, the high
yield was at 3.052 and we just can’t tolerate a move through 3.087 without
adopting a much more bearish posture going forward, regardless of what might
happen from any low that develops. Yield trades that high would all but force
us to adopt as our preferred count, a 5-wave move from the yield trough in
December and that would suggest that once it completes, it will only be the
first of several. That is a scenario whose implications we will further explore
if necessary but suffice it to say that for now, we would love to see that area
hold. If one seeks
more evidence that the weakness in bonds is nothing more than a failure of
stocks to continue their plunge, then they need to look no further than the
rest of the news out today as it is nearly all bleak. It’s been reported this
morning that home prices are down 30% from their 2007 peak and that a full 20%
of homeowners are currently under water on their mortgages; numbers that are
only getting worse. The Refi Index fell 15% just since last week and ADP
reported private sector jobs losses for last month to be more than 60,000 above
estimates. If there is any good news to report, it is that mortgages opened
this morning several bps tighter than where they closed yesterday although
that, too, is likely the result of the fact that treasuries that were bought in
anticipation of a potential meltdown in stocks, are being sold in the absence
of that meltdown. 3/3/09 - If market sentiment were truly enough to turn the stock market around – and it usually is – then it would seem a rally is in the cards as all we can find to read this morning is gloom and doom. Actually yesterday, Personal Income and Personal Spending were both reported to have been better than market guesses but that did little to discourage sellers from pushing stocks to their worst levels in a more than a decade and that helped support the bond market, but if you were to look at a chart of the bond market along side a chart of the stock market just since the first of the year, you would see what can be interpreted as a fairly disturbing picture for bonds. During that time, 10-year yields are up more than 90 bps while the Dow is down 2000 points. If it is truly the weak equities markets of the past several days that are lending the recent bid to fixed income, then what’s going to happen to bonds if the stock market makes a low? The longer dated treasury markets seem to be hanging by a thread here and we continue to feel that a trade through 3.08 in the 10’s will not bode well for the longer term health of that market so the notion of a ‘bounce’ in stocks – whether it comes as the result of signs of a recovery or just market sentiment – is un-nerving. So now that we’ve tossed our ‘gloom and doom’ into the mix, it’s only fair to state once again that we suspect that the 10’s are headed back up through the recent trading range with targets beginning in the mid 122’s and extending to the mid 123’s even in the more bearish scenarios. It’s what happens from there – assuming of course that we do get there – that will make or break our analysis. Aside from the
negative news being reported about stocks, a more telling story may be the one
we see this morning addressing the corporate bond markets. It seems that
corporate spreads are deteriorating faster than they have at any time since
November and they have remained in the neighborhood of 5 times their historical
norm. Additionally, 30-year mortgage rates are hovering about 200 bps above the
10-year while the decade long average of that spread is closer to 170 bps.
Bottom line is that the crux of the problem we are dealing with, namely the
global credit crunch, is not showing any signs that it is improving and until it
does, we are not likely to be reading much in the way of positive news about
the economy.
For now, we continue to look for the 10’s to hold in
the mid to upper 120’s as between 120-27+ and 120-15+, we have 50 and 62%
retracements of the rally that began on Friday as well as a gap left yesterday
morning. From somewhere in that range, we would expect to see another push
towards the top of the trading range from early February in what we believe
will be a C-wave and what happens then will tell us volumes about what is
likely to occur for the foreseeable future.
3/2/09 -While we began to get indications on Thursday that the decline in treasuries was more likely a B-wave than an impulse wave, Friday’s failure by the markets to retain opening gaps caused us some concern. By this morning, however, we seem to be back in a rally mode based on what can be described as a near collapse in equity prices. While it doesn’t seem to take much news these days to drive stock prices down, the news out of AIG was probably enough to make even a good market go south. Already into the government for something like $150 billion, it was announced over the weekend that they would be seeking another $30 billion after suffering the worst 4th quarter loss in corporate history; a staggering $62 billion. Early morning trades in the S&P futures were at levels not seen since the end of 1996 leaving the ‘B-wave’ picture there nearly destroyed and likely needing a complete reversal today to put it back in play. That said, we still feel as tough the stocks are working on a 5-wave decline from January, which could complete a bigger 5-wave break from last April if not from the 2007 top. That wouldn’t likely end the bear market, but it should create a bottom of some degree sometime soon, from which a strong rally would occur. We’ll just have to wait and see if that can really materialize as for now, stocks are headed south, and treasuries are reaping the dividends. We mentioned in
Friday’s update how the higher close on Thursday after testing the lows of the
move was not characteristic of 3rd wave action leaving us to embrace
the more friendly B-wave scenario that would suggest we could see bonds return
to the upper end of the trading range established in mid-February. Now, with
the help of the ailing stock market, that seems even more likely as we have
pushed well above the highs established early Friday morning in the 10-year
futures but as seems to be the case more often than not of late, neither the
cash markets nor the 30-year are cooperating with the 10-year futures so as not
to offer any confirming indications. The same thing happened at Thursday’s lows
as well as at Friday’ highs so while we like what we see, these markets are
just too volatile to be projected with any degree of confidence. For now, we
believe that the 10’s are headed back up through most, if not all of the
trading range that has been developing since the lows of 2/09 and that would
suggest at least another point above the highs of today. Describing the
rally today as a ‘flight to quality’ rally due to the weak equities, helps to
explain why, one again, the mbs markets are not participants. Fnma 5’s, while
higher on the day, are struggling to improve upon Friday’s best levels and
while we’ve continue to report that they appear to be in a large sideways range
since the top, at some point they need to breach the 102-16 area to avoid a
developing picture of a market in need of a secondary decline not unlike the
one that began the first of January and carried them down 2 points in 13
trading days. As mentioned above, absent a full-blown reversal in stocks today, they should be headed down further and now, very likely possibly below 700 SPX. That should provide fuel enough to sustain further rallies in fixed income. By the same token, only a full reversal in bonds with lower closes, would offer any reason not to think they have plenty left in them and even that, would not leave us with an impulsive looking decline from mid-February so for now, we expect continued upside in the treasury markets although the ultimate wave placement there and thus, objectives, are still a bit elusive. |