Stocks And Yields Walk Down A Familiar Path In October

The 10 year is already 25% off of the August lows as yields closed out the week at 2.23%. The stock market has calmed and has acted relatively complacent since the shortened holiday trading week earlier this month. Stocks have shaken off poor earnings from market leaders such as Alcoa, J.P. Morgan, IBM, and Apple. The market is being lead by energy plays like Chevron, Exxon, and Conoco Phillips, up 18%, 16%, and 20% respectively from the September lows. Energy makes up a large portion of the SPX, and CVX and XOM are also two large components of the Dow Jones Industrial Average. It appears that many of the underlying issues with global markets are being ignored so long as the indices can post a gain. Volume on the SPY has been almost pathetic since Columbus Day which can be telling us that the market is up on hot air. On an intraday basis, most of the volume of late has come in the 3pm timeframe and it is clear that institutions have been buying the market late in the day in order to force positive closes above key resistance areas. This is not an uncommon occurrence, however the frequency of these actions have increased exponentially over the last three weeks.

Despite this, the uptrend is monumental and must be respected. There were many investors who bet against the market in the middle of 2009 and in fall 2010 for the same reasons I have listed only to have their portfolio evaporate at the hands of low volume bear market rally which was fueled by the Fed’s POMO.

The 10 year is forming a similar pattern as it did last year leading into November. In 2010, the TNX formed an inverse head and shoulders beginning in August, which ultimately played out after the Fed began QE 2. Currently, one could make a case that there is once again an inverse head and shoulders pattern on the TNX (albeit a very sloppy one) leading into November when the Fed makes its next policy decision. At the very least it has made higher lows, and as stated previously, it is already 25% off of the 52 week low.

Ultimately, there are two reasons as to why this may be happening. The market is either expecting more intervention by the Fed, or the market is being led higher which would be a setup for a selloff following any disappointment from the FOMC. The scenarios seem simple, but the market is just floating right now and barring any type of sharp reversal in the next couple of weeks, the market does not seem like it wants to budge from its current course just yet.

There are a few mixed signals regarding market breadth, commodities, and currencies. As far as market breadth goes, the Nasdaq 100 lagged the market this week, closing negatively for a loss of 1.42%. Meanwhile the S&P 500 finished positively gaining 1.12%, and the DJIA also finished positive with a gain of 1.41%. This is an unhealthy signal for the market. In a true bull market, the Nasdaq 100 should be keeping pace (and often should be leading) with the market. The DOW is composed of dividend yielding, safety plays such as WMT, MCD, CVX, and KFT. When the DOW is leading a rally in a bear market, it is a sign that investors are not comfortable putting their money into riskier stocks. Obviously AAPL’s miss had an effect on the Composite, however, GOOG, INTC, YHOO, and MSFT all posted better than expected numbers which gave the NDX an opportunity to drive higher. Small caps are also an important indicator to watch, the Russell 2000 finished flat this week, losing just .04 points, but still well behind the DOW and S&P. Again, if investors do not feel confident enough to take on more risk-heavy plays like small caps, then it tells us that there is still an air of caution in the market, despite the solid gains made in the past 3 weeks.

One thing that is worth mentioning about the chart of the NDX is that there is the potential for a massive W-V reversal should the market pull back – maybe to the 2225-2250 area. This will have to be monitored as it lines up with the idea that the market is leading into Fed intervention for a potential move higher.

On Friday the SPX was pushed higher in the last 10 minutes of trading in order to force a close above 1230.71, which was the previous higher of the recent trading range. However, this is not a breakout. a breakout comes after confirmation, which would be a close tomorrow above Friday’s high of 1239.03. Notice how in the beginning of the month, we closed below the August low of 1101.54, but the next day the pivot low was made and so began the current rally. Confirmation completes a breakout and therefore saves a trader from making a decision that can turn out to be a costly mistake.

In any case, should the SPX confirm above 1230, it has short term resistance at 1249 and then following that it has two master levels. One is 1260, the flatline of the year, which is needless to say, an extremely important level. The final area of short term resistance is the 200 MA. Confirmation above this area could signal a structural change in the market, though I personally do not expect that to play out.

Another slightly conflicting signal is the Euro. It is not conflicting in the sense that it has made a higher low, and looks identical to the yields chart. It also has an inverse head and shoulders pattern on the daily chart that has a target of 147.75. That exchange rate would be close to the YTD high, and though the pattern is somewhat sloppy, it has to be on the table as a possible scenario.

The conflicting signal I’m referring to is that the Euro broke a major trendline over the summer and will have a mountain of a task in getting back above the triple necktie of moving averages on the weekly chart. Also, the longer term view of this chart shows that the Euro may beginning to form a head and shoulders reversal starting in June 2010. If the Euro inches higher, but hypothetically, cannot get through the weekly MA’s, a right shoulder would be in play with a neckline around 132.50.

Oil like stocks, bond yields, and the Euro has recently made a higher low which indicates short term bullish momentum. However, there is a topside trendline that was closed above this week but without confirmation. In fact, the weekly chart of oil shows a doji candle which is more of a neutral signal, and not a candle to base a breakout on. Oil has support between the 50 and 20 MA on the daily chart and a pullback may allow it to build enough momentum to break through this trendline. If oil can get above $90/barrel it should coincide with a breakout above 1230 on the SPX and the next stop will be around $95.

Copper has also made a higher low but the bounce has been only half of what other major asset classes have had. Since the most recent low earlier this month, the SPX is up 14%, oil is up 15%, the 10 year yield is up 25%, and the NDX is up 13%. Meanwhile, copper is only up 8% off of the October lows. Another key difference between now and 1 year ago when the market was leading into QE 2 is that this year copper not only broke through a major 3 year trendline in August, but copper is also near it’s 52 week lows, while this time last year it was in the process of making new 52 week highs.

The weakness in the metal is probably the best indicator that this rally has been full of hot air. Copper leads the market and is still down over 30% from its YTD high, while the SPX is down only a mere 10% from its peak in early May of 1370. The only technical upside that copper has is that after many attempts it has still failed to confirm below the 200 MA on the weekly chart. Should copper stay in this area for the next 2-3 weeks and fail to break through, it will likely catch a bid and back test $3.70-$3.75 which should coincide with a higher equity market. If however, copper confirms below the 200, it will be headed for $2.70 and the equity markets will fall with it for another test of the 52 week lows.

Overall, the next 2-4 weeks should decide where the markets are headed over the next 4-6 months. Any large intervention program would probably make for a similar scenario as the one that we had last year, though I still do not expect the market to make new highs again. Conversely, any disappointment will take the air out of this rally and the October lows will be retested again. Therefore I think that regardless of the FOMC’s policy statement, we will be headed lower over the next 12 months. The market can rally on weak volume so long as Europe stays quiet. However, Greek bond yields reached another high this week of 188% and Merkel and Sarkozy believe that they have come to an agreement to bail out the banks with 100 billion Euros. The plan is pathetic, 100 billion Euros is enough to bail out community banks, not institutions with trillions in CDS exposure like Deutsche Bank, and Credit Suisse and in addition, the longer that they take to complete the EFSF, the more the market will price it’s ratification. Be sure to have a large cash base and keep positions small as news is going to be the driver of the market for the next couple of weeks.

Zero Hedge – Moody’s Chief Economist Proposed Deal Will Avoid US Downgrade

And there you have it. Mark Zandi, better known for predicting at least 18 occurrences of a US recovery in the past 4 quarters, and being as wrong on the shape of the US growth curve as everyone else on Wall Street (although being Moody’s head economist that is a perfectly normal track record), just told CNN’s State of the Union that the deal is substantive enough to where Moody’s will not move to downgrade the US’ AAA rating. Naturally, the fact that this is merely another massive can kicking exercise which will see the US debt ceiling raised by $3 trillion with actual cumulative cuts of about $100 billion tops by November 2012 at which point yet another debt ceiling hike will have to be planned is irrelevant. All that matters is to get the S&P back to the year’s highs, 120% debt/GDP (same as Greece) be damned.

From Politico:

Former Moody’s top economist Mark Zandi says he’s quite “excited” by the framework of a debt ceiling deal being discussed on the Sunday shows — and believes the certainty of substantive deal will lift markets and head-off a downgrade from AAA.

“I’m not in the rating agency… but listening to what they have to say, I think this would be sufficient… but this is substantive and should avoid a big downgrade,” said Zandi, adding that some agencies “may go down a different path.”

“If the deal collapses, look out, he warned. “If there is any misstep here it will likely undermine confidence and we will likely slip into recession…the economy literally hangs in the balance,” Zandi told CNN’s “State of the Union.”

But if the deal hangs together – a big if, considering the likely opposition of tea partiers — it’s “great news and that gets us very close to fiscal sustainability — I’m very excited.”

Being the apparatchik that he is, and that would fit perfectly in any centrally planned bureaucracy as a D-grade sycophant, he also had the following to add: “The bicameral, bipartisan committee “is a positive step” that will give markets a real sense of certainty on future deficit reduction.”

Ah yes, let’s leave the future of our country to a “bipartisan committee” whose determinations will be completely ignored when the time comes. Any why not: Obama will have a carte blanche to continue on his present course for another $3 trillion worth of debt.

http://www.zerohedge.com/news/moodys-chief-economist-says-proposed-deal-will-avoid-us-downgrade

I believe my comments from yesterday on the matter were as follows:

Moody’s is either making themselves look more foolish than they already are by constantly attempting to grab attention, or they are actually serious about a downgrade and will do so next week. Moody’s, like S&P have missed many obvious ratings in the past (take MBS for example) and it seems foolish for anyone to care what credit ratings they decide to give out. Additionally, a downgrade of US debt without labeling many others across the globe as junk is hypocritical and adds to the ridiculousness of their image.

So is Moody’s really going to wimp out again? Do they realize that it is the empty threats and pointless attention grabbing like this are the reason that no one really cares about their opinions anymore? I guess I’ll leave the surge in UST’s on Friday as evidence that the market excludes just about anything they say from their sentiment regarding bonds and equities.

S&P Closes Below 50 Day MA For First Time In 6 Months

The market was extremely rattled today as investors flew out of equities and commodities and into bonds and the dollar. I think that this is the beginning of more dollar index strength but the moves in the precious metals sector today were beyond irrational at least of the precious metals producers, some of which were down 10% or more for the day while gold and silver bullion was down one and two percent respectively. The precious metals sector was well overbought from a technical perspective and has been due for a pullback, but some positions were way oversold today and I believe that they will continue lower for a few more trading sessions.

The S&P 500 closed at a monthly low of $1295.11 which resulted in a close below the 50 Day MA – something that had not happened since September 1, 2010. This may be the beginning of a correction in the equities market, and the I believe that the stories which I have covered recently are coming together as expected. On Monday I said that in the near future I see stocks slowing down or perhaps peaking, the dollar reversing vs. the euro, and continued strength in commodities as PIIGS countries face sovereign debt issues. These particular markets appear to be unfolding as I have forecasted. As far as the move today in precious metals, the pullback was well overdue (I also had previously stated before that I expected one to happen soon) and I firmly believe that it will not last for any significant amount of time.

The S&P broke the 50 Day MA as well as the 6 month trendline that it had previously used as support. On Monday, I mentioned the divergences and the RSI and MACD – it appears that the wedge that was setup along with those divergences has also broken down and the volume behind the trading has been in favor of the bears for the last 2 weeks at least.

Those who follow my work know that as a contrarian play, I’ve picked the dollar to rally against the euro. Today the dollar index was up $.77 as the euro fell $1.09. The dollar is also up $.90 for the week and the ETF UUP can complete a key reversal on the weekly chart that’s pictured above with a positive, flat, or slightly negative close tomorrow. In any case, even if it closes substantially lower and misses on a key reversal, it is likely to still be bullish engulfing which means the market has rejected the absolute lows and is giving us a buy signal.

Conversely, the euro index is forming a bearish engulfing pattern for the weekly chart and can breach the lower trendline in the rising wedge pattern that I depicted monday. The catalysts for the weakness in the euro have been the Moody’s downgrade of Spanish debt, the sharp rise in Greek bond yields, and the inevitability of a Portugal bailout this spring. I see these trends continuing for some time and I believe the best way to play this is from the long side of the dollar index.

Gold and silver were slammed hard today with gold losing over $19 and silver losing $.84. Shares of mining and royalty companies were hit extremely hard, some being down 5-15% which is a clear cut indicator that we are only in phase 2 of the bull market.

Gold broke its month long trendline with volume on GLD only slightly above average but the move was a big one nonetheless. Gold found support at $1400 and rejected the lows which were fought off right at the 20 Day MA. The momentum is in favor of sellers and the next support level is around $1380. I expect to see some weakness here but the situation in Europe will bring money back sooner than most people think.

It was a shock to see some of my silver positions down over 10% today however a second look at the market’s activity assured me that there was no reason to panic. First of, despite this bigtime selloff we’re still trading 6% above the 20 Day MA and 15% above the $30 support. In addition, intraday lows of nearly $34.50 were rejected and we’re still overextended from trendline support.

It would also take a roughly 6% selloff tomorrow to close below the previous candlestick on the weekly chart. So despite all the action today, even the short term momentum is still intact (from a technical perspective) though I do believe that the trendline on the daily chart will likely break before silver makes a run at $36. Based on the current direction of the 20 Day MA, we should find some type of support around $34.20 – $34.50. Currently, I am waiting for this market to give me a buy signal, until then, I’ll continue to watch the market correct lower.

30 Year Falling Wedge, Silver 20 Day MA, Gold 50 Day MA & Resistance

The reversal in the 30 Year took has carried out as mentioned in my last post and in doing it so completed the falling wedge pattern. I expect some stability is bond prices as we move forward though I remain bearish on the fundamentals long term. Considering the amount of Federal intervention, I don’t favor the long or the short side of bonds, I can merely forecast price movement, which is an important benchmark for the overall market.

Price completes falling wedge on big intraday range, hollow buying candles follow

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Silver yet again bounced off of its 20 Day MA. Continue to watch this trend.

If the price closes below that moving average at any time, then the $32 price target may be off the table and a correction may be in play. The divergences between oscillators and price activity is there, but they don’t mean anything except caution until this trend is broken.

Gold on the other hand has been running into trouble.

I expressed last week that I believe that gold will consolidate in the coming weeks as it did at the end of 2009 before breaking out again. It appears that the trend is supporting my prediction as gold tested resistance again this morning but the price was rejected and the 50 MA is less than a handful of points away. One of these must give and I still believe that it will be the 50 Day MA.

Don’t think for a second that the reversal in bonds isn’t at all related to the slowdown in gold

Be prepared for a correction similar to the one that we had in July where analysts bombarded the news with claims such as “the gold bubble is bursting”. This correction will be followed by a run at $1500 in early months of 2011. Currently support is at $1262 and $1220. I don’t expect the price to break through that first level of support at all so be ready to buy if the price gets close.

30 Year Bounces Off Of Support, COT Reports

Today the 30 Year Treasury Bond Price bounced off of support after opening below it. The lows were rejected intraday and the price finished higher. I wouldn’t be surprised to see some consolidation here, maybe a short lived rally, but at the same time I expect these lows to be tested again. The bond market has been fragile ever since the Fed announced that it would give itself the role of propping the market up. A selloff of over 15 points since Jackson Hole (12 since Nov 3) is not something to be taken lightly. The US Treasury has a long standing reputation as the safest asset in the world. When that much confidence is lost in that short of time due to fears of the negative effects of QE, it signals that they are serious signs of unrest in the global marketplace.

The COT report came out today and the results may have had a hand in silver finishing higher on the day as another 1,514 short contracts were covered bringing the total to 57,398. Just a few months ago on the September 28th report, there were 73,075 commercial shorts. If this pace continues we’ll be seeing $40 silver by mid 2011.

Goldman Sachs Offers 50 Year Unsecured Bond, Enjoys High Demand

http://online.wsj.com/article/SB10001424052702303341904575576272129018674.html

By KATY BURNE
NEW YORK—Goldman Sachs Group Inc. sold $1.3 billion of 50-year bonds Tuesday, its longest senior bond ever.

The sale was targeted at private investors rather than institutions, but institutions accounted for about 20% of the buyers. according to a person familiar with the deal, who speculated that the interest could have come from hedge funds.

Until now, Goldman’s longest-dated debt went out 30 years.

The issue was increased from an originally announced $250 million because of strong demand. The bonds were priced to yield 6.125%, compared with initial guidance of 6.125% to 6.250%. In the institutional market, Goldman would have had to pay 6.750%, according to people following the deal.

The senior unsecured bonds are expected to be rated A1 by Moody’s Investors Service, A by Standard & Poor’s and A+ by Fitch Ratings. The minimum purchase for investors was $25, and 52 million of the notes were on offer, up from 10 million when the deal was announced Monday.

The bonds can be redeemed by Goldman at their original face value of $25 at any time after the first five years. Proceeds from the sale will be used for general corporate purposes.

Goldman has sold large offerings of preferred and hybrid securities before, but not senior debt maturing this far out, according to a person familiar with the deal.

The firm served as sole bookrunner on the deal, supported by the retail brokerage arms of Wells Fargo, Bank of America Merrill Lynch, Citigroup and UBS.

Goldman’s most recent U.S. 30-year deal was for $2.75 billion in December 2007, according to Dealogic data, and its most recent sterling-denominated deal was for £325 million ($511.3 million) in January 2008. The firm paid 6.75% and 6.875% in nominal interest on those bonds, respectively. A spokesman declined to comment on the new issue.

More recently, Lloyds Banking Group PLC sold $750 million in 40-year debt aimed at retail buyers with a coupon of 7.75%. This month, a debt offering from J.P. Morgan Chase & Co. featured a tranche of 30-year bonds for $1.25 billion with a coupon of 5.5%. That offer didn’t target retail investors.

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This unsecured bond is a no-brainer for Goldman Sachs. If people are willing to give you money at an interest rate of 6.1% when real inflation figures are much higher than CPI(more than double and triple in some cases), you'd have to be crazy to not go for it. This bond, as the article mentions several times, is aimed at retail investors who are being told by pundits and deflationists that inflation is under control. Unfortunately, it appears that there is high demand for 50 year Goldman debt.

The Fed Has Gone Too Far, Stock Market Trading Insanity

The USDX took out the 76.67 level without a fight. That’s the second major support level that’s been literally blown away in the last three weeks and the fifth since the beginning of June.

All I have to say is when does it stop before the Fed realises it cannot fulfill its mandate of maintaining employment? Do we have to hit 50 in the USDX before the bond market collapses and the Fed figures out they just ruined a 300 year old country?

I knew that the dollar index was on its way down, but it should not be in a free fall at this point. I thought that maybe there would be an upward rally for a few weeks… considering we’ve been in oversold territory on every technical indicator for weeks… I was wrong. When you go to pay your bills, buy your groceries, fill your gas tank, just remember what the Federal Reserve is doing. During a period of economic contraction, recession, depression- the upside is supposed to be that the people have the benefit of a strong currency. Instead, the Fed wants to weaken our currency and make the pain that much worse. History is repeating itself in front of us….

Here’s an article that CNBC posted on the bond auction.

An already-tough week for Treasury auctions turned dramatically worse Thursday when investors skipped out on a 30-year bond sale.

Comstock | Getty Images
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The $13 billion of reopened long bonds was a mess: the yield of 3.852 was well above the when-issued level; a bid-to-cover ratio, or the measure of how much was bid compared to each dollar auctioned, came in at 2.49, which was the worst since February and well below the average of 2.70; and foreign interest, as measured through indirect bidding, was a paltry 32 percent.

The poor results added to earlier losses for the bond market, which fell even though the stock market also was off in afternoon trading.

The 30-year was half a point lower in price to yield 3.85 percent, while the benchmark 10-year note shed 10/32 to yield 2.46 percent.

Treasury yields have fallen in recent weeks as traders piled into the market on bets that the Federal Reserve would begin another Treasurys purchase program to help stimulate the economy and create healthy inflation.

Traders also awaited Friday’s key speech by Federal Reserve Chairman Ben Bernanke and a set of economic reports on inflation and consumer sentiment.

“The focus is going to turn to a pretty event-filled day tomorrow with two economic reports, (consumer prices) and retail sales, and the chairman himself, Bernanke, is going to be speaking, and he usually has dovish things to say.”

http://www.cnbc.com/id/39668055

Insanity: doing the same thing over and over again and expecting different results.
Albert Einstein (1879 – 1955), (attributed)

Insanity in individuals is something rare – but in groups, parties, nations and epochs, it is the rule.
Friedrich Nietzsche (1844 – 1900)