Stocks need to stage a massive rally tomorrow in order to keep this rally going. One of the best trend enders (as well as starters) is the three period test. Tomorrow, I will be looking for the weekly three-week-test-of-the-high. If we fail, I will expect the market to head lower, much lower.
Yesterday's dramatic surge in the 10-Year Note market resulted in prices moving to extreme price levels. Watching futures prices plummet yesterday made me think just one thing 'this is pure panic!'
Unfortunately, we can't always be right in our recommendations. Sometimes we get caught being on the wrong end of such a move. If we are unprepared, often we find ourselves instinctively "bailing out." We are motivated by the fear, by the panic. We let emotions take over and this results in prices moving beyond the +2 or -2 levels. These levels illustrate not reality, but pure emotion. Short covering spikes are pure emotion, panic selloffs are pure emotion. They do not reflect reality. Once the dust settles, prices revert to the mean. It happens all the time.
Having Adequate Capital
Never go into a trade without knowing the risks you might face. You must understand what the current level of volatility is, what the average level has been and how high volatility has been in recent time frames. If volatility is currently low but rising, as has been the case for bond prices, then you have to believe that dramatic moves, pumping up volatility, might be in the cards.
You cannot ignore the trends when volatility is rising. I've been in the bond market for a long time and have learned never to fight the trend. I remember back in 2004/2005 when I was certain rates would rise, the only time the market went my way was in overnight trading. During the day, rates trended lower and lower and the people on tv encouraged the wonderful news - how lower rates were wonderful for the economy so that we could refinance our mortgages and pump up the economy.
Now I am readding far too many bond analysts looking for the expected pop in bond prices. And while it might happen and they might be right, they are fighting the trend. This is something that must be avoided if you want to consistently make money.
Having adequate capitalization is the biggest key in futures trading. Markets go up and markets go down. Sometimes we are right and sometimes we are wrong. But if we can go into a trade having a plan, knowing when to admit we are wrong, and exiting the trade with a small loss, we will live to trade another day. When selling options out of the money, as some of us do, solid capitalization is the key. We sell options at prices at the extremes. Rarely do prices move to these extremes but sometimes they do. That is part of the game. While there might only be a 1% chance that it will happen, considering that there might be 200 trading days in a year, rather than being unprepared for it, you must plan for it happening and must have sufficient capital on hand to avoid having to close out your position at the absolute worst time. When the dust settles, prices revert to the mean. They always do. Option premiums deflate, they always do. If you are inexperienced or your broker is inexperienced, you will find yourself getting out of a great position at the absolute worst time.
Selling Premium is the Best
If you've read my Time is Money articles which you can access through the links in the right hand column, you'll understand why I believe that selling options is the best way to make money consistently, month after month. But don't think that you can go into a bond position with $5,000 and make a ton of money. The markets are handled by "strong hand" pros who can whip markets around at will, devasting the little guy. If you are a little guy, you can still partake in this game plan but you need to limit your risk.
If you can't put up at least an extra $10,000 or more above the initial margin requirement, establish a credit spread. A credit spread allows you to receive income but limits your loss in the event you are wrong. You won't make as much as by just simply selling an out of the money option, but you will never lay awake at night wondering when the price move will end.
If Your Broker Exhibits Weakness
It is times like this when we can truly see the experience of our broker. Is he nervous? Is he telling you that you should now take additional measures that may in fact increase your risk? If you are in the bond market now and on the wrong side, you should be able to really judge the knowledge and experience of your broker. If you are undercapitalized and sweating it because your broker overleveraged you, then you need to change brokers. If you are well capitalized and understand what you are doing, extreme times like this should be a thrilling time to be able to watch the awesome power of markets. If you are worried because your are undercapitalized or worse, your broker doesn't know what to do, contact me. While I am not a broker, I can provide you with good advice and help you find a good broker who can meet your needs.
How can it be that after months and months of facing the facts, 10-year rates languished, struggling to get above 3%? Then suddenly, rates started running and haven't looked back. Everyone in the world wanted to short bonds but the fear of the Fed's intervention seemed to be the only thing holding them back. Last week though, Fed buying was tepid and rates started to run.
Today's run (including after-2pm trading) pushed 10 year yields to 3.75%, up more than a quarter percent from yesterday! The move was an extreme PLUS 3 move.
Time to Leave the Bond Market?
I'll be the first to admit, I haven't been watching the Chryler/GM situation as closely as I watch broad-based indices, but there is a true heaviness in my heart about how the Chrysler bond-holder situation was handled. I couldn't believe my eyes when President Obama faced the world and called bond-holders, who were holding out for their legal say in court, were bashed and criticized by the president. I mean it's not like these CEOs, Victor Pandit for one who earned $100 million last year, they don't have to take the pain. The highly paid bank CEOs who have cost taxpayers billions of dollars aren't asked to give up some of their gazillion dollar homes. Could it be that really, the bankers are calling the shots? More on that later.
How bond holders could be denied their rights as senior creditors totally destroys my apparent illusion of the markets. Watch what is going to happen. People will sue the fund managers for selling out and doing what Obama wanted. These fund managers had a fiduciary responsibility to their clients to fight for their rights. The fund managers gave in and deserve to be sued. But just as when Bush ordered telecommunication companies to illegally tap US citizens, when the public tried to sue, they were not allowed to. Wrong-doers get immunity. It's not fair. It's not right.
And now they are messing with one of the greatest parts of America, it's free enterprise system. Where winners are allowed to win and losers lose, not get bailed out. Bonds, bonds, bonds. Everyone thinks they are so boring. But they are a bad bet. Exceptionally high volatility, attempts at manipulation and no legal rights make the risks of taking positions in the bonds too ridiculous for me.
Fortunately for Us
Forgive my rant, I object to the volatility and market manipulation that might have led to it but I'm happy to say that I was positioned correctly for the move. And furthermore, I anticipated that the move would gain more and more momentum. If you have been following my blogs, you too have been capitalizing on the rate rise. If you read my blog yesterday, you would also know that we started selling stocks as the market rose to our anticipated level for the week. We further positioned ourselves for a down move this morning, while preserving much of our better than 10% gain year to date. Our cash position is now above 50%.
10 year note rates surged to their highs moments ago, reaching 3.583, touching a very powerful resistance level. Momentum is continuing to expand and may have enough power to push it to the 4% level.
The surge came even though the 5 year note auction was successful with greater than usual demand.
Yields on the 10-year note rose to a critical resistance level yesterday, the 10 month moving average. For years now, this moving average has provided the cap to yields and until proven otherwise, it must be respected.
Apparently I'm not the only one seeing this resistance. In a Bloomberg report this morning, some analysts expect yields to fall back down to the 3.25% level by the end of the year. Rates were at 3.15% just last week before surging to the 3.56% level.
I wondered how we might find ourselves in a position of a falling stock market and rising yields. Certainly if the stock market challenges the low levels it made in March, the accompanying economic news will surely be gloomy and will have to have an effect on rates. Reviewing the charts of rates and stocks, each seem to be at an important high point and may begin to fall together.
I began taking some profits yesterday perhaps a little early. I want to have lots of ammunition in the event of another market meltdown. My rationale is that even if the market meltdown doesn't come, the core stock portfolio is up more than 11% this year. But I caught myself the other day discussing the current economic situation with a prospect. I was saying that in reality, there is no new wealth being created. Markets are rising because all of the new trillions of dollars need to find a home. The biggest loser is going to be the one holding the cash because the continual flow of new dollars will erode the dollar's value. Only by keeping it invested in something can we hope to avoid the inflation.
In the end, it's all a big shell game. Where do you keep the money so that you don't lose wealth and also keep up with inflation?
Markets Steady This Morning
So far this morning, markets are quiet after a strong day yesterday in both stocks and rates. Still looking for the three-week test of the high in stocks. We might have reached the peak already as yesterday's weekly Dow chart illustrated. 10-year rates could also be at their high as they are touching resistance levels. If you have some nice profits as we here do, be sure that you preserve your wealth and don't let these great gains slip away. Remember, 'The Market Giveth and The Market Taketh Away.'
As the Dow passes 8450, I become aware of the falling resistance line that could spell the end of this dramatic rally off of the March lows. With our core account up around 11% thus far, in what many expected to be a horrible year, I am jumping the gun a little and starting to adjust our core portfolio. In some cases, I am taking excessive profits and buying 2011 LEAP Call Spreads. This will enable us to take some money off the table in certain stocks where we have made big profits without totally giving up a long term position.
More to come as the week progresses.
Interest rates surged this week reportedly on investor nervousness regarding the potential credit downgrade as well as the mounting debt that the US Treasury is issuing. Neither story is new. If you have been following the Asset Design Center blogs all year, you will have noticed that we have been positioned for such market turmoil from the very beginning. Just like the laws of nature, economic and finance laws are universal and are bound to eventually catch up with the marketplace.
The above chart is a weekly chart of the ProShares Ultra Short 20+ Year Treasury Bond (TBT). It is the instrument that we have been using in our stock portfolios as a core holding. While the chart is weekly, notice how powerful the three-period idea can be. After making lows in December, TBT came back down in March establishing a three-month test of the low.
SPX Making a Different Pattern
I've got to admit, reviewing stocks this weekend in preparation for possible actions at the end of this new week, I was surprised that so many stocks are still on a run.
Potash was one of such holdings. We purchased POT at 73.22 and sold the January 09 call at 22.70. At this point, our net profit on the position is greater than 30% for a five-month holding period. With only 3 points of premium remaining on the position, we may close the position out and build up some cash in the event that the market will decline. There are many, many stocks that appear ready to fall apart and I would like to have cash on hand and be ready to pounce when the opportunity is right
Don't Need To Be Greedy
Asset Design Center clients know that our format is to build portfolios that provide you with the required rate of return with minimal volatility. It is not our goal to make 100% on your money each year but to achieve your financial objectives through consistent year-to-year steady growth with minimum volatility. If you have extra money available that isn't in your goal saving plan, you can use it to "rock and roll." Our relatively conservative options on futures accounts are up nearly 30% this year. There is always room to "rock and roll" after all of your important objectives are met. Even though we like to think that our futures ideas are conservative, just as the realities of higher levels of debt are sure to cause a lower debt rating and higher interest rates, earnling 5% to 10% each month is also beyond the realm of normal expectations. There is always that once or twice events in a year that can destroy your gains if you are not experienced enough to know how to work our way out of it. .
TIME TO PARTY
While the wonder as to what North Korea's nuclear gamesmanship will have on the world markets tomorrow, the day will be set aside for enjoying the day. As a Viet Nam era veteran, and a disabled one as well, I choose to spend the day with other vets and friends before returning to the real battle when electronic trading begins tonight! Have a great day and enjoy.
While many will think that the stock market endured a rather dull week, in truth, it was a very important week. As I have been reporting since last week when the market finally broke it's winning streak, it's time to start watching for a topping formation. One of my favorite topping formations is the three-period test of the high. As stock markets settled in to close virtually unchanged this week, we can see that we continue along a perfect setup for the test of the high. Should the S&P not close above the 929.23 level next week, or 8,575 on the Dow, the market will provide what I believe is one of the most reliable reversal signals.
Many have been saying that if the S&P falls beneath the 889 mark, the market will fall, perhaps to new lows. While I am, nor have I been, bullish throughout this entire move, I think that it's premature to predict a return to the markets' March lows just yet. One must not lose sight of the fact that the Fed is continuing to flood the market with dollars. These dollars have to find a home. If you are holding dollars, then you are certainly going to lose. Yesterday, I heard on the stock market tv channel that even Warren Buffet does not have any cash. Rather than interpretting this as a bullish sign, I thought that it just makes sense. Whoever says that cash is king is not looking at the continual devaluation of the dollar that is taking place.
When the Treasury Secretary claims that the US has a strong dollar policy, the following chart illustrates that either the secretary is telling a big fib or that he just sucks at his job.
At the risk of being called a "wacko," I believe that the Secretary, being the former head of the most-important New York Federal Reserve bank, is using his government position to enhance the wealth of the Federal Reserve, to which he will most likely return once he finishes looting the taxpayers.
There has been lots of talk about how big of a lender China is to us but are we really beholden to the bankers? With the Federal Reserve buying another $300 billion of Treasuries, I would guess that in the end, the bankers who own the Federal Reserve will probably be our biggest creditor. The Federal Reserve's and Treasury's actions are only to serve in creating still another asset bubble. The trick is to identify the bubble, get as much profit as you can, hedge your newfound wealth and be sure not to be the last fool in the game!
Bubble Bursting on Bonds
Above is the daily closing price of the June 10-year Treasury note future as traded on the CBOT. Note prices have been in a major decline since the Fed's announcement in March that they would be buying $300 billion of long-end Treasury Securities. Price declines picked up momentum on Thursday when the Fed's purchases of long-end treasuries fell short of what the market was hoping for. Many are now predicting that the Fed will step in to moderate the decline. But is this really in their best interest? The Fed merely represents the banking cartel. Higher interest rates result in a higher debt payment that the US and everyone else will have to make. Banks like to get higher interest payments. Unfortunately, I'm too old to believe any of the babble that comes out of the mouths of bankers or politicians. They say one thing but act in a totally different manner.
Those who have been reading my materials know that Size is the Key. When Size is increasing, you cannot, MUST NOT go against the trend. The chart above shows the weekly size of the 10 year rate. It has just gotten to "average" but because it is rising, you must not begin to think that the decline in bond prices is over. It is just starting! Don't expect the Fed to step in to moderate prices. If they are truly acting as a fiduciary for the bank owners, they will buy Treasuries at the best prices, when yields are significantly higher than they are now. You've got to remember that the Fed is not a government organization. It is a private banking organization. We have already seen that there is no limit to the amount of greed in the banking system. Even former-Federal Reserve Chairman, Alan Greenspan, lamented that he couldn't believe that the banks would not act in the shareholders' best interests!. Of course he was right. Banks did act in their best interests. Who the real owners are though, that is the question. Just look at the billions of free money the banks have been getting. Just look at all of the future gains they will receive. Certainly, the banks, at least the favored banks that are on the "too big to fail" list will win big. It is our job to make sure that we also buy into these banks, but at the right price!
Other Effects of Falling Dollar
The above chart is the daily action of the CRB Index. At one time, this chart used to be closely watched as a sign of inflation. Be careful. The Federal Reserve and Treasury tells us that there is no inflation. Our biggest concern is DEFLATION! But again, don't listen to the talk unless you like talking about it at cocktail parties. Last year when the oil prices skyrocketed, we didn't have inflation, we had "pricing pressures." Call it what you want. Prices are going up, we have to pay more. In the end, I hate what the Fed and our government is doing to our purchasing power. Even China now is trying to break it's habit of taking dollars. It is going to be a hard habit to break, but the sooner we can move to making transactions in gold or some other medium, the better off we will be. Unfortunately, the dollar continues to retain value because there is really no other fiat currency that is any better. In the end, fiat currency is only worth the value of the paper it is printed on.
Oil, Oil, Oil
I like oil. Each day I hear that there is no reason for oil to be so highly priced. There is no demand. I remember last year that supply/demand had no relevance in the huge runup in oil prices either. It was the dreaded "speculators" who caused prices to run up. If my money needs to be someplace, I think that oil is a great place. Like gold, it is traded in dollars so it will help preserve value. Unlike gold, it is consumed, every day, in greater and greater quantities as less developed countries develop.
As some people say that they have been buying gold continually to preserve their wealth, I have been doing the same with oil I have been using the Exchange Traded Fund OIL.
Oil has a long way to go on the upside. It doesn't matter whether the cause is increased demand or dollar devaluation. I like oil the best. While I do have a position in gold, I remember the day when it was illegal to own gold. Do you? Yes, it's true. Not too long ago, it was illegal to own gold. If the government was able to do it back then? Why can't they do it again? What if the dollar totally collapses and the government decides that it must go back to the gold standard. Do you think that they will let you hold on to your gold?
I hope I'm wrong but I think that it's prudent to think through every possible idea. Remember what they say, those who don't remember the past live to repeat it.
Have a great holiday and be sure to subscribe to the Trendsetter newsletter.
Rates on the 10-year note continued surging at mid-day, breaking above the 3.45% level after testing the 3.15% level yesterday. The 10% rate move certainly feels like a panic setting in as the world is beginning to realize that credit ratings also apply to the US government. It should come as no surprise to anyone that rates would rise dramatically. Now that the banks have gotten tons and tons of dollars virtually for free, now they can begin to rape and pillage consumers, jacking up interest rates even more.
Stocks are rebounding today after being down close to 2% yesterday.
Be sure to check out this weekend's report. I expect next week to be a very important week as we move into the end of the month.
Rates surged yesterday to overbought levels. The move began as a result of the Federal Reserve's less than expected purchase of long-term securities. Further exacerbating the move was Standard and Poor's outlook that UK debt will lose it's AAA or highest quality status. Many expect that this will also happen with the US' debt.
When the financial crisis hit at the end of last year, the UK's debt to GDP level was at 44%. The US' debt to GDP level was 63%. S&P lowers it's credit rating when debt to GDP levels reach 100%. Major organizations such as the IMF expect the US' level of debt to exceed 100% of GDP before the UK.
Dollar Losses Continue
The US dollar has also suffered as a result of this "New" worry. Well, it's not really a new concern. It has been real and ongoing. The US cannot continue to borrow $100 billion each month and continue to bail out and absorb losing businesses. It cannot continue to print trillions of dollars without expecting that its currency will devalue. It's simple economics that anyone should be able to understand.
We have been short the dollar, the stock market and US bonds from the beginning of the year and long on oil, gold, and agriculture commodities. We feel that we are positioned well for the coming economic disaster that is sure to take place. While the stock market has been surging, it's no different than any other commodity. With trillions of new dollars being put into play, these dollars need to find a home. It's not new wealth being created, it's inflation. There is no real new value being created. If you disagree, please comment and tell me where I should be looking.
There could be one last gasp to the upside in stocks next week and then a new down trend may begin. This weekend, I am putting together a special report to Trendsetter subscribers identifying which stocks might present good trading opportunities. If you are not a subscriber, send me an e mail and I will put you on the free subscription list.
This could be a very important time not only in the market, but in the history of mankind. You owe it to yourself to get all of the information that you can so that you don't possibly lose all of your wealth. We saw how ugly it got during the last decline. Can you imagine the fear that will pervade the world if we break through to new lows? Can you understand that the government is already preparing for mass panic?
The market rally we have seen has all been engineered by the government. It's not a real thing. It's just perhaps giving them time to prepare for the meltdown that might occur.
Rates finally popped after testing the 3.15% level on the 10-year. Not sure what news occurred to cause this quick rise. I was surprised that it didn't occur earlier with the jobless claims data (slightly improved over last week) and the LEI, see linked story.
While no news looks particularly bullish in my book, I've been amazed at the spin the tv people have been putting on the market. Seems that all of the market rally has been based on 'less than catastrophic results.' Anyway you look at it, it's still pretty ugly. I can certainly see stocks getting back down to test the lows and probably breaking through. It's interesting though that interest rates are beginning to move away from the spin and are starting to reflect the market realities of increasing debt issuance with no end to more spending.
Claims again came in greater than expected, with 631,000 claims filed in the previous week. Rates and markets were unphased by the number, the 10 year rate holding at 3.17%.
Notice the chart above showing the general decrease in volatility. While we still target the 3.6% level next month, one can see that rates are holding within a well-defined pennant formation. Having this perspective is important regarding our trading strategy. We are up about 30% so far this year selling strangles, that is out of the money puts and calls, on a 10-year trading vehicle. We continue to employ this strategy going forward until our long term perspective changes. From our perspective, we are not really concerned whether rates go up or down, as long as they remain in the pennant.
If you would like to learn more about the strangle strategy and how to make lots of money in any kind of market, take a look at the Time is Money articles that I wrote. You can access them at the Ezine article box in the right hand column.
Great Strategies, Great Payoffs
Selling options is a great idea almost always, even when you wish to buy stocks. Our 2009 core stock portfolio has a number of buy-write positions. At the beginning of the year, when volatility levels were high, we were able to purchase stocks and sell at-the-money options generating 30% - 40% of premium. This gave us a great risk-reward ratio. Most of our plays provided for a better than 30% downside protection with a high probability that the position will pay off with a 40% to 50% gain for the holding period.
If you are not using derivatives in your trading strategies, you are missing a great way to define your risk-reward parameters. If you would like to learn more about the many strategies that can help you make more money, subscribe to my Ezine articles or the Trendsetter newsletter.
Interest rate futures rose slightly this morning in anticipation of this week's jobless claims number. While analysts are expecting the number to be around 600,000 losses, better than last week's 637,000 number, rates none-the-less declined. From our chart analysis last night, it appeared that rates could rise today. The Conference Board's report on Leading Economic Indicators comes out later this morning. This number as well is expected to strengthen. If all the economic news is positive, then why are rates falling?
The news still appears to be a mixed bag. Our old friend, Mr. Greenspan, has weighed in with his opinions on banks. Of course, he's not in charge any longer so now he is a doubter. Of course he is. He is still stunned in discovering that banks would actually act in their own best interests instead of those of the shareholders. I for one am certainly not surprised to see how Mr. Greenspan could have been fooled. If you had ever listed to Mr. Greenspan's testimonies to the congress, you might agree that he never really said anything nor did congress ever ask him anything. His testimonies were so vague that actual college courses developed in Greenspan-ese!
On top of worrysome comments by Mr. Greenspan, other comments emminated from the mouths of others running the show. Mr. Geitner expressed less than total confidence that the economy was really improving and the release of the Federal Reserve meeting minutes for April also caused many to worry. It appears that GM's financing arm will need an extra $7 billion or so to get by. The US Government will be direct owners now of Chrysler and GM. For sure, my next car will be a Ford. Talk about unfair competition. I am always for the underdog.
I, along with many others, are expecting that the markets will begin to break down very soon. I will be doing an in-depth analysis of the 100 industries that I cover and will have some timely ideas for subscribers.
Interest rates along with the stock market backed down today after Treasury Secretary Geitner expessed continuing concern over the financial recovery. Notice in the chart above how interest rates fell back nicely to the moving average and appears to be positioned to break out to the upside.
In previous writings, we illustrated how rates could surge to 3.6% by early June. Sure does look like a good possibility from these levels. Last week, I was unsure that rates could hold this channel. I have not expressed any confidence in this government-engineered spurt in the market. The bottom line is the continual devaluation of the dollar and increased debt issuance keeps us positioned in our core stock market portfolio with ultra short dollar and bond positions. Government intervention in the 10-year and 30-year treasury market is always a threat for our short-term derivatives positions. It was best to remain cautious.
The daily chart looks like we can expect a pop in rates tomorrow. Position yourself appropriately.,
Disappointed with Media
I'm disappointed in reading Martin Crutsinger's AP article this morning AP Inaccurate Reporting referring to the Federal Reserve as a Government Agency.
"The proposal the administration was considering would centralize the enforcement of laws that protect consumers of financial products, such as credit cards, mortgages and mutual funds. That effort currently is spread across a number of federal and state agencies, including the Federal Reserve, the SEC and the Federal Trade Commission. "
Such inaccurate reporting perpetuates the myth that the Federal Reserve is working in our best interest when in fact, it is just a group of bankers. We have already seen that the amount of greed in the banking system is only limited by the amount of wealth in the universe. It really taints my belief that President Obama is really serious about resolving the economic calamities that the economy has faced in the past. Bubble after bubble has been the result of monetary policy imposed by the Fed. Putting the Fed in charge of everything will surely put an end to the capitalist system as we know it.
Who's Looking Out for You?
We are! The Asset Design Center provides Guardian Angel protection in your investment and financial planning needs. Be sure to sign up for the June Trendsetter issue. Most certainly, the trillions of dollars the government has been printing has been going somewhere. The ultimate question is "Whose pockets will it all end up in?" Make sure you get your share.
It's only mid-May but I like to look at what might come as we approach month end. Both stocks and interest rates fell today. Many are suggesting that the market power is waning. The Stress Test results are in and the whole review seems to be a sham. Talk is now turning to credit card defaults while the number of homeowners receiving foreclosure notices continue to increase.
I've also been hearing a lot more about Ron Paul's bill that allows an audit of the Fed. There appears to be a growing awareness of the fact that the Fed is a private organization consisting of bankers. That the Fed is taking trillions of taxpayer dollars and giving it to it's own constituents is beginning to trouble a few. Politics aside, there still is a mistrust of Wall Street, especially banks. While the US has assured us that no bank will fail, the banks may cause the US to fail.
The market was down after a two month run. The next two weeks will tell the story. I invite you all to send me an e mail requesting Trendsetter updates and the June edition. I expect to have some great trading ideas over the next two weeks that only subscribers will know about.
Have Rates Topped?
After 30-plus years active in the markets, I know that one must absolutely respect the trend. With two weeks to go still, I'm not sure how this chart will play out. The upside does appear to be running out of steam but I do believe that just as with stocks, the next two weeks are going to be the key.
I did get a little spooked though and closed out my Note Options today one week before expiration. I had one short call position remaining as I expected rates to rise but today, I felt some doubt and closed. We are up 7% for the June option period. I might reestablish the short call position should the 10 year rates hit 3.08%. From this level rates might stage a run at the 3.44% mark. On the monthly chart though, the trendline is coming in at 3.16%. We closed today at 3.13% after trying to get through the 3.16% level.
The next two weeks is certain to be a special time for short term traders. I expect to be active in both stocks and bonds. You might be able to see from these monthly charts that we are close to some serious points in the market.
Again, I encourage you to drop me an email and tell your investor friends. The Trendsetter subscription is still free but it won't stay that way forever.
Rates on 10 year Treasuries remained neutral this morning, resting at the 3.08 level, right on the moving average, as the market braces for CPI data to be released in a little over an hour. Yesterday's PPI data came in stronger than expected at 0.3% for April with food cost increases leading the way.
While the Federal Reserve continues to focus on deflation, paying little attention to inflation, as the daily chart of Soybean futures indicates, some prices are rising sharply. We need to be positioning ourselves for strong moves in the agricultural markets. We have discussed this issue and how to position yourself in recent Trendsetter issues.
How the market reacts to today's data release is uncertain but it's important to note the rising trend in interest rates as well as strong price increases in commodities.
Rates fell further this morning despite a worse than expected Producer Price Index reading of +0.3% in April. Higher food prices led the surge. Initial unemployment claims data was also released this morning showing that the unemployment problem continues. While today's report showed 637,000 more jobs lost, more troubling was the increase of 6,000 in the four week moving average showing that momentum continues.
Chart Pattern Shows Opportunity
Notice how rates have come to the bottom of the channel. It's no surprise that rates have backed off as they near strong resistance at 3.44%. I expect that rates will remain down on the week and moderate at low levels through next week. Next Friday Options of Bond and Note futures expire and the low rates cause futures prices to be higher. I expect the following week, that rates will again surge, breaking through overhead resistance moving towards my target of 3.6%.
Now is the time for extreme caution with your investments. Again we appear to be setting up for the same situation that sunk many investors last year, that is prices of both stocks AND BONDS are setting up for declines. Without EXPERT investment management many are sure to get clobbered again. Keep in mind that while diversification is the key, diversification means having a portfolio of assets that are NOT CORRELATED. Having a good mix of stocks and bonds might not be enough as it appears that BOTH STOCKS AND BONDS WILL GO DOWN!!!!
Make sure that your investment manager can show you proper risk management strategies to make sure you are NOT TAKEN TO THE CLEANERS - AGAIN.
Rates dropped close to 3.1% this morning after the Commerce Department reported that Retail Sales for April again slipped, falling 0.4%. Analysts had expected sales to be flat for the period. Retail Sales Fall Further
Housing News Still Weak
As rates fall more than we expected, we will be watching for the reaction at 3.06%, the rising trendline. Despite weak economic data, the world continues to be increaslingly nervous over the trillions of dollars of debt that the US is issuing. As reported last night, some have expressed doubt that the US will continue to hold its triple-A debt rating in light of the weakening of the Social Security and Medicare systems.
David Walker warns of Dollar Rating Reduction
Walker reports that Moodys Rating Service warned that increasing Social Security and Medicare costs could engulf the US government in debt for decades. A report today on the health of Social Security said that the system might be insolvent earlier than previously expected.
Expected by whom? Don't think that many of us believe that Social Security will be here for us. It's just been another tax
Despite the recent rate decline, when we look at the weekly Volatility Chart (Size, we see that Size is Rising and a primary trading rule is that when Size Rises, Stay with the Trend. If we take a read of where the average size price comes in, we see it's around.25. At average size levels, a +2 standard deviation move from the trend line would put us at the 3.5% level.
Already, many analysts are worrying about the surge in oil prices. I've seen gas prices surge from 2.20 to 2.65 within a week!. Some say that already the recession is about over and so there is increasing demand. Others say that oil is way overbought and that there is no reason for it going so high.
Oil Prices on the Move!
The weekly oil chart looks pretty bullish to me. I don't see resistance on this chart for a long way to come. We have been bullish on oil from the beginning of the year as we believed that trashing of the dollar would be best played by investing in oil gold and other tangible assets.
And EVERYTHING ELSE!!!
It's not just oil. Look at the CRB index. It also is going up. For Fed Chairman Bernanke to say that deflation pressures are easing but we still need to worry about them, he's certainly looking at something different. But we all know that there is nothing that the Fed wants more than inflation. Very soon they will get their wish. MAKE SURE YOU ARE PREPARED!
Rates have been moderating since last week's surge. Did the Fed intervene? Are rates moving too quickly?
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After an ovesold rebound yesterday (accompanied by a Wall Street selloff), 10 year notes appear to be resuming their current downtrend. The 20-day average appears to be providing current resistance. The dollar continues under pressure as well.
More and more analysts are starting to state that the stock market is overvalued already while others claim that we are in a new Bull Market!
Seeking Alpha article with Rep Grayson YouTube.
Just when I thought I've seen it all, I see the story about how Obama wants the Fed to be the Economy's SUPERCOP!!! Super Cop Ben. Don't get me wrong, I thought it was great when the Banking lobbyists got rid of the Glass-Steagall Act allowing the banks to weave their way into every aspect of my life. I cheered when the banks lobbied to be able to leverage up from 10-1 to 30 or 40-1 on their loans to capital. We partied hard when they began packaging mortgages and were able to shuffle them out of their system so that they can continue to make bigger and bigger profits, much of it going into the pockets of a chosen few.
Seeing Tim Geitner, a former Federal Reserve Bank President now a federal regulator reminds me of the days when I worked at the Commodity Futures Trading Commission (CFTC). I most fondly remember how the CFTC Chairwoman, Wendy Graham, had the opportunity to regulate energy futures contracts, the kind that Enron was involved with. How surprising it was that after she declined to regulate these instruments, she wound up on Enron's Board of Directors. Funny how no one ever reviewed this connection, at least not that I've ever seen. And now, we have an ex-Federal Reserve banker in cahoots with his Fed buddy Ben Bernanke saving the world by giving the banks billions and billions of taxpayer dollars. And now, on top of giving the banks all of our money, our elected leader wants to give control over banks and investment houses to the Federal Reserve!
For those who don't know, the Fed is not a government organization. And while there is a lot we do know about the Fed, there is a lot more that we don't know about the Fed. Like who really owns the Fed? Who profits from all of the dollar bills the Fed puts in circulation at a cost? It's not us taxpayers. It's the richest of the rich who hide in the shadows. It is the richest of the rich who have for decades called the shots in our country. It is the richest of the rich who now are pulling all of the strings to give them ultimate power over all businesses in the US.
One Man's Battle
There is a 'cry in the wilderness' though, the voice of Congressman Ron Paul. You might remember Ron Paul as a candidate in the recent presidential elections. While he was not a major candidate, those who followed him were passionate about his cause. Out of all of the candidates from both major parties, it appeared that only Ron Paul understood and defended the US Constitution. Others in power have been making a mockery of it as our civil liberties continue to be eroded.
Federal Reserve Transparency Act of 2009
Representative Paul outlays the plan to enable the Comptroller General of the GAO (Government Accountability Office) to audit the Federal Reserve system before the end of 2010. Per the Federal Reserve, "Monetary policy is exempt from audit by the Government Accountability Office."
Back Where We Started From
Seems to me that we the government is again trying to pass the buck. It's obvious that self regulation has not been working. Even Former Federal Reserve Chairmain Alan Greenspan said that he never ever thought that banks would not act in the best interest of the shareholders. I think that Jim Rogers got it right by moving to Singapore and focusing on the Asian markets. China is getting wise to the game here. When will we?
"There will come a time where the lack of Chinese participation may have a significant impact," said Illinois Congressman, Mark Kirk recently after touring the Bureau of Public Debt. In a recent AFT article
The MSCI Pacific (less Japan) ETF, soared 12.2% this week, helping this index ETF gain more than 18% on the year.
Basic Materials Score Big
With only a few exceptions, Basic Material stocks have rallied hard in anticipation of economic recovery.
Leading the way are oil service stocks, in particular, Transocean, Ltd., which is up nearly 60% on the year. RIG was one of our Trendsetter buy/write picks at the beginning of the year.
I'm no economist and I'm certainly no genius. The problems that confront us seem so obvious. Will the Fed also be seeing this? Will they step in and aggressively buy long term treasuries to get rates again below 3%? I think that they will try. Still though, rates are headed higher based on my statistical work. Expect higher rates to hurt the stock market. If you've earned some nice profits in this recent runup, take some money off the table, sell options against your position or engage in some hedging strategies. Remember, Bulls and Bears Make Money, Pigs Get Slaughtered. Don't try to make back all of your losses at once.
Rates appeared to be setting up for a drop prior to the 30-year auction. Notice how on the hourly chart, rates were testing the three period high and appeared to be failing. Then the disappointing auction results were reported. $14 billion with a high bid of 4.288% with only a 2.14 bid to offer rate. The market was expecting a high bid of only 4.17%. Well, as I have been writing for months, eventually the heavy supply coming to the market each month was eventually going to have an effect on rates. And now with the stock market up on the year, receiving 4% for 30 years just doesn't seem to cut it anymore. But how will this all play out?
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