Consumer Confidence Stops Rate Surge

Once again, as the 10-year rates try to break above the current 3.80% resistance, a piece of negative news rattles the markets. Consumer Confidence, as reported by The Conference Board, plunged to 46.0 this month, down 10 points from a revised January reading of 55.9. The 1-year Treasury rate fell to 3.2 after battling to get above 3.8 the past few days.

As the above chart shows, this setback may only be temporary as rates have been showing a strong persistance to the upside. While we don't expect rates to blast through the 4.0% level without some strong news, like China bailing out of Treasuries or something like that (WHOOPS, That is already happening), we do expect that it is only a matter of time that it will happen.

We expect that this upward trend in interest rates will continue despite government and Federal Reserve efforts to hold rates low.

10 Year Auction Strong - Rates Fall

Rates fell to the 3.12% level on the 10 Year Note following a strong 10 Year Auction today. The high rate was 3.19%, lower than the expected 3.228% the market was expecting.

As we have been reporting over the past couple of days, rates appeared to be testing the high at 3.174 on a close basis. Should rates continue down, we expect support at 3.04%, the 4 week moving average.

Rates Setting up for New Move?

The stock market has come down some since Ben Bernanke began speaking. Rates are also moderating but still holding at the 3.15% level. While it is still early in the day, we can see the development of a potential move tomorrow.

If the chart pattern remains similar to how it appears now, we can expect that tomorrow, we will have a three-day test of the highs. I suspect that rates will surge through to higher levels and may take some action to play this potential move. Should we not make a new high on the move, rates might fall back, perhaps to the 3.04% level I had seen at the beginning of the week.

S&P Surges Past 900

The S&P surged yesterday nearly 30 points possibly marking a top in the market's current move. Not sure about this but there was certainly panic buying in the market. The bands in the chart are not the usual -2/+2 bands, but -3/+3. According to my study, the S&P's price standard deviation yesterday reached +2.57, definitely IRRATIONAL.

I have yet to become a believer in the market and actually was selling some stocks in my personal account. I am still waiting for a retest of the low. It may not come but I still find it hard to believe that the economy is truly recovering. Seems as if it's all been done with smoke and mirrors. I prefer to focus on trading the 10 year futures. the interest rate futures seem to me more transparent.

Interest rates again tried to bring levels below 3.15 and succeeded but not by much. Volatility continues to shrink which is great for option sellers. I do expect option premiums to expand some tomorrow as we near the much awaited Stress Test Results. Seems though that the "leaks" of this news has been adequately MANAGED and the bond market has been relatively tame. Don't think any news from this front will result in interest rate Shock and Awe.

Unemployment news follows on Friday. Will there be any surprise here? Think that we are all immune to new unemployment numbers in the 600,000. Think that it will take a number exceeding 700,000 to scare the market, or some unemployment rate well beyond 8%. Otherwise, this news may also be an nonevent and interest rates will continue to languish.

An analyst on tv this morning mentioned that perhaps the Fed is managing interest rates to gradually creep up. Again, note the term MANAGED. Well, this also remains great news for options sellers. Believe me, there is nothing worse for an option seller than for Bernanke to open his mouth, causing interest rate futures to soar five points in a heartbeat.

We will be keeping our eye on volatility levels but for now, it seems to make sense to continue selling option premiums with a bias towards higher rates. Can't forget however that there is a significant long term down trend line that still must be respected.

Unemployment Claims Improve..

but not by much.

April 30 (Bloomberg) -- Fewer Americans filed first-time applications for unemployment insurance last week, indicating the pace of job losses is slowing even as the total number of people on benefits continues to break records.

Initial jobless claims decreased by 14,000 to a less-than- forecast 631,000 in the week that ended April 25, from a revised 645,000 the prior week, Labor Department figures showed today in Washington. The number of people staying on jobless benefit rolls increased by 133,000 to 6.27 million, the 13th straight week the figure has set a record.

Interest rates have been thriving on dismal economic news and are now resting on the upper boundary of a possible trading channel. Despite continued strength in rate movement, Volatility strength as measured on the daily basis, is starting to weaken. A much stronger move is needed today to keep this rally going on a short term basis. End of month portfolio shifting could also be contributing to the recent move.

With the power of the Fed lurking in the background, rates may reverse course temporarily. While the Fed is big, the Global bond market is even bigger. It will be interesting to see what the Fed does in implementing their long-term treasury buyback plan. While their timing is important, the size of their purchase will show how serious they are about driving rates down below 3%.

Fed, Consumer Spending Boost Rates

Despite a -6.1 Gross Domestic Product showing for Q1 2009, markets chose to focus on a 2.2% increase in consumer spending. When the Fed chimed in saying that the end is in sight, 10 year note rates broke through the 3% level and 30 year rates broke 4%.



The daily rate chart above shows the evolution of this move. Since the last Fed meeting when rates dropped to 2.5%, rates traded in a tightening pennant formation until last week. Two times after breaking out of the pennant, rates came back to test the upper pennant levels but held firm. It was no surprise that rates finally picked up some momentum on the upside.

Despite the apparent strength, today's move caused rates to jump to an overbought level. Notice also that rates are near the upper boundary of a possible channel. That's not to say that rates can't go higher. I would expect rates to respect this channel for the moment and perhaps fall back to the moving average before breaking higher.




The weekly chart shows a similar picture. Rates have reached the upper boundaries of a declining channel. Again, this resistance level must be respected. Earlier work discussed in previous blogs indicated that rates could possibly go to 3.2 and to 3.6% by June.




Weekly volatility is starting to rise and can increase a lot just to reach the average level. Rising Volatility requires one to stay with the trend, which is up. Short term trading opportunities might exist over the next few days and a retracement to a trendline could occur before some news provides an impetus for rates to break through strong resistance levels.

Rates Rise as Fed Meets

Ten year note rates surged to close above the 3% level yesterday spurred on by improving consumer confidence and housing data. Rates may continue to rise following today's report on 1st quarter Gross Domestic Product (GDP). Analysts predict that the economy might have shrunk 4.7% last quarter. An improvement over the previous quarter's -6% decline.

Markets have been reacting positively to recent economic data releases even though the numbers are still very negative. For example, yesterday's Case-Shiller report on real estate prices showed a year over year drop of 18.6% based on February figures. Business news analysts claimed that investors were encouraged that the rate of decline may be slowing. January's figure showed a 19% year over year decline based on a ten-city index.

The government's debt auctions continue to go well. Despite the massive amounts of debt the US is incurring, Treasury Bill, Note and Bond auctions continue to be over-subscribed. The dollar has remained strong in world currency markets.

With all of the cross currents in the news, trying to make decisions on future rate moves based on fundamentals proves to be difficult. On one hand, the economy still appears to be very weak. The potential damage that the Mexican flu can cause to the world economy weighs in favor of lower rates. However, the ever increasing US government debt levels should add to higher rates.

Technical analysis however indicates that pressures are building to push rates higher. Rates have been continually falling for years though. The recent monthly test of the lows may prove to indicate that this exceptionally long termed move may have finally come to an end.

Don't ever lose sight of the market truism, "Markets can remain irrational much longer than investors can remain solvent."

Mexican Flu Rattles Markets

With just a couple of days left in the month, my attentions are turning to my monthly analysis. Last month, I detailed several scenarios that I thought the Dow could take. I always feel most comfortable when I see a three period test of the low. April data is playing right into this scenario. Granted, there are three trading days left in the month and anything can happen but seeing how the pattern is developing, it is my best guess that the stock markets will fall next month, testing the lows or at the very least, the red support line.

There appears to be a heavy supply of news that could be interpretted negatively causing the market to again collapse. The bank stress test results so far have been pretty lame. Who among us doesn't believe that the banking system is still in trouble? More and more people continue to lose jobs, consumers are tightening their belts, spending only on necessities. And the biggest potential problem is the Mexican Flu situation. I can't think of anything that has to potential to rock our world sufficiently enough to drive the markets below the February lows than this.






NOTE RATES A MYSTERY



The chart of the monthly 10 Year Interest rate shows a successful three month test of the low. As expected, rates are up this month but despite this bullish pattern, trying to get a handle on the news that may affect this market is confusing. There is still the red colored trend line that must be respected. This comes in at the 3.20% level. Yesterday my daily chart work targeted a much higher level and truly, this chart leads me to want to bet that rates can easily reach the 4% level again, if we can just clear the 3.2% hurdle.


Rates have fallen this week as the Mexican Flu worries have stimulated a "flight to safety." But how safe are Treasuries? How safe is the dollar? The Treasury and Federal Reserve have been taking huge bets that their stimulative efforts will revive the economy. For their gamble to pay off, the economy needs to rebound with significant growth. What happens though if we are hit with another panic situation? What happens then? I can see it now, government officials, bank CEOs, major manufacturing companies on tv; will be explaining that it is the Perfect Storm. We could have never seen this coming! Of course not. It's called RISK!

10-YEAR NOTE RATE TARGET: 3.6% on June 5

Picking a major market move is no easy feat and those who can notably do it wind up earning millions of dollars on Wall Street. By using some basic chart reads though, we can make logical guesses on where markets might go.

We have seen a nice recovery off of the panic low rate levels. In mid-November, 10 year rates tried to break below the 2.0% level but since have been fighting their way back.



As we have discussed in previous posts, when market prices break through a key support level, the market will usually try to get back to that key level. Rates recently have been pressing up against the 3.0% level and on several occasions, broke through only to fall back. Notice however that pullbacks from 3% are weakening. Rates really want to advance or so it appears.

I like to look at a number of derivative views of price to help make my decisions. An important one is the rate of change of the moving average. One can easily deduce that when the average change in the moving average is positive, price is going to continue to advance. Many chartist might look at the above chart and recognize a saucer pattern developing. This is generally a bullish indicator.

I'm not sure how much longer rates can be contained. The Federal Reserve meets this week. The Fed has been known to rattle the markets with their announcements. The last time the Fed met, their decision to aggressively buy longer term treasury securities caused the 10 year rate to drop from 3.003% to 2.53% in one day! This move provided a key data point in our newest trend line which is rising.

As we run out of room on the lower boundary, unless something really major occurs, rates are probably going to break out to the upside. But there are possibilities for major events. General Motors has just announced a restructuring and as I write, a stock market news commentator is chiding the market. The Dow is opening up down 80 points and the commentator is challenging the markets. 'If you can't keep it down today ...' he says, in an apparent heckle at the Bears. I guess he thinks that the market will shrug off the GM news and eventually rally. If this occurs, then rates will probably rise above 3% today.

Another factor that must be considered is the potential effects of the flu epidemic. I can't think of anything that would rattle the markets more than closing down borders, shutting down businesses, etc because of the flu outbreak. But assuming that the markets will move forward in a normal manner, one might expect rates to break out to higher levels and challenge the two overhead trend lines.

If rates drift to this upper target, one can predict that the rate might hit the 3.6% level in 28 days, when the two upper trend lines converge.

Keep in mind, this blog is not meant to be a recommendation to buy or sell any investment product. Be sure to discuss potential trading opportunities with your professional Financial Planner.

Geitner Reassurances Move Markets

April 21 (Bloomberg) -- Treasury Secretary Timothy Geithner said the “vast majority” of U.S. banks have more capital than needed, stoking a rally in stocks as investors await results of stress tests on the balance sheets of the biggest lenders.

Continuing to be correlated to stock market moves, long term interest rates also rose but failed to break out of the current pennant formation.

Rates Fall as Bank Earnings Disappoint

Friday's advance in 10 Year Note Rates gave us the opportunity to close out our short call position and enabled us to establish one more short put position in the May option series. May options expire at the end of this week.

We sold puts this morning, rates have fallen as bank earnings news gave the market cause to sell off. Continuing to remain correlated to stock market moves, the 10 year note rates also fell, giving us the opportunity to establish our first June position. We just executed a sale of call options.

As I mentioned on Friday, I thought that the price would remain in the pennant and it did. But now, I see that in this moment, the price could hold the 4-day moving average (also a three day test of the low) and tomorrow break out and begin a move to the upward limits of the channel that is defined above.