Fed Returns to Boost Market - Will We Ever Have Reality Again?

Stocks staged a massive rally this week with the S&P 500 rallying more than 300 points or 12.2% from the previous week.  Of special notes, REITS (real estate investment trusts) rallied the sharpest, rising 24%.  Midcap stocks which have been underperforming for quite a while also turned in stellar weeks, with the Midcap (MDY) and Russell 2000 (IWM) rising 18%.

From an industry perspective, all sectors of the market rallied.

 
Basic Materials, a sector that failed to make new highs in the latest market bull thrust, performed best, rising 20.6%.

Closely following was the financial sector, rising sharply on the Federal Reserve Bank’s latest stimulus announcement
Federal Reserve Stimulus - CNN article

I had been paying close attention to a number of exchange-traded funds to gauge the health of the US economy.  It appeared to me that low interest debt had enabled businesses that might have failed in 2008-2009 to remain.  These had often been referred to as Zombie Corporations.  As interest rates continued to fall, businesses were able to issue more and more debt to stay afloat.  Eventually, some event would trigger this debt to default.  It was my thought that when these ETFs started to drop in price, it would be an indication of an impending recession.

One of my proxies for this lower quality debt was an instrument with the ticker symbol JNK.  As the symbol implies, the debt held in this ETF is just that, junk.  You can see that this ETF price fell off a cliff.  There was a real possibility that heavily debt-ridden companies would go bankrupt.  But that reality quickly came to an end as the Fed announced that they would bail out not only quality corporations, but shaky corporations as well as states, counties and likely foreign banks and governments as well.  Soon the Fed will own the entire world.


Other ETFs that the Fed may now be buying include:

If the Federal Reserve Bank can buy these ETFs, and the Fed can’t lose money, then if could be foolish to try to fight the trend.  Or so it seems.

What's Next?

In a normal world, the rally to the 50% retracement level is by no means extraordinary.  While many oohh and ahh over the remarkable rally, the Fibonacci retracement levels automatically include a 50% retracement along with the real Fibs of .328 and .618.  In some theories, prices failing at the 50% retracement level can be expected to fall to the -.23 level.  This would suggest S&P prices falling to the 1900 level.

It's hard to imagine this to happen though.  Despite 16 million people filing for unemployment and businesses across the world being shut down, liquidity has always seemed to reign supreme, despite any fundamental support.

Once again, markets have no correlation with reality.



Money Supply Spikes

As the chart of the M1 money supply illustrates, money supply has been surging to dizzying heights, now backed not only by government treasuries but also a wide range of corporate bonds.  Some can interpret this as the Federal Reserve Bank and the US Treasury taking control over US corporations.


The increase in the money supply is said to be temporary and will be pulled back when things normalize.  But as we've seen post-2009, things never normalized.  Any attempt to decrease the money supply was met with swift negative market reactions.  This is the new reality, 0% interest rates, increasing Federal Reserve stimulus actions to keep the financial structure afloat; many suggesting that it won't be long until the Federal Reserve starts buying stocks.  Again, does it make any sense to fight the Fed?  It does appear to be inevitable.  But ultimately, must it fail?

I thought it might but after 11 years of the Fed-controlled market, I do not expect to see a normalization in my lifetime.  As such, I choose to stay out of stocks, except for special situations such as some gold and silver mining stocks.

I continue see gold still as a safe haven.  In times of loss of confidence in fiat currencies, gold stands out as one asset that can provide purchasing power.

Gold futures rallied to new recent highs but still are a few hundred off of the lifetime highs.  One can expect gold to continue rallying and perhaps even silver following.

Two Schools of Thought

Inflations:  Gold and real estate are often said to be good hedges against inflation.  The sharp move in REITs this week along with gold making new highs supports this view.

Deflation:  How quickly will the economy recover?  Some suggest that things won't start getting back to normal in July, the President is pushing to get things moving as quickly as possible.  A slowing economy might present a deflation scenario.  Holding US dollars is often recommended to ride out this storm.

I suggest holding both.

Intermediate Top Alert

Stock markets fell last week as concerns over a new virus swept the globe.  S&P 500 index fell nearly 70 points to close at 3,225.52.

Those who follow Elliott Wave counting have been looking for an end to the current wave up, so a down move has not surprised some.  For others, fear that the market's current stretch is overdone, has caused concern.

As the chart shows, price has dropped down to break through the stop-loss marker generated by the Wilder's Parabolic indicator.  a break below the stop loss indicator signals the investor to sell the position and reverse course, using a new stop indicator that begins to form stemming from the last high price.  A closer examination of this chart SPX Parabolic Chart shows that in sideways markets, it could cause one to sell at the bottom only to rebuy at the top.  

Looking at the daily chart, with a Bollinger Band, one can see that price has reached the bottom of the band, for some, that could indicate an oversold level and a buy.

When I look at such a situation, I begin tracking the standard deviation which can be seen in this chart on the indicator BBW.  This is the Bollinger Band Width.  As the Bollinger Band width increases, it tells me that volatility is increasing and I want to stay with the trend.

We can also see that the other times that price has hit this lower level of the bands, it rebounded and stocks continued along on their merry way, ever higher.  A difference that we may see now is that there has been real economic damage as a result of the virus.  China is being sealed off as neighboring countries close borders and airlines cancel flights to China.  The potential economic effects of the situation has not been lost on bonds which continue to rally towards the highs.

Bonds have been rip-roaring for the past two weeks and appears to be headed much higher.  That said, having a proper asset allocation in your investment portfolio should help you should stocks continue to fall.

Also, Gold has been a key performer.

And while I have been touting Gold and Silver for awhile now, few have gotten on board neither participating in normal market accounts through exchange traded funds such as GLD and SLV, or through outright physical purchases.  

Both bonds and precious metals have moved opposite of the market offering a balance in a diversified portfolio.

Lots more market action to come this next week.  How you want to position yourself depends upon your overall outlook.

Very Long Term Outlook SPX  This link takes you to my TradingView market charts page.  I encourage you to go there and follow my thoughts as we go through the market gyrations.  In this long term outlook, with prices going back beyond 1929's great depression, one might see that the market outlook appears to be on track to advance for decades to come.  

On the intermediate term however, the first SPX chart shows my expectations for the next week.  Prices should rally to test the weekly highs.  If we fail to exceed the highs, I expect that prices will fall back.  How deep the correction will be is hard to say but from past experiences with such tests of the high, a failure usually brings about a significant decline.  My first expectation is a move down to the 3100 level by March option expiration.  I will be planning to purchase put option spreads, through March expiration, to capture this expected move.  But as in the past, these setups have more often than not played out as events such as the Fed adding liquidity or the President pounding the table to buy have overshadowed normal expectations.

It's hard to imagine that the market will be able to get any traction on the downside, at least not until after the elections in November.  But considering that many investigations into Trump, culminating with an Impeachment trial have yet to get Trump out of office, perhaps the only way would be to destroy the economy so prevent his reelection.  

The president appears to be extremely vigilant though of this possibility and his immediate criticism of the Fed when they tried to raise rates shows that any actions by others to hurt the market are quickly addressed.  While this time may be different, I expect that news that an antidote for the virus has been found and off to all time highs - again.  

What do you think?  It will be an interesting week in the markets for sure.

Be sure to visit my Trading View site at https://www.tradingview.com/u/Glewis54/

Jobs Data Delights All

STOCKS SURGE

The Bureau of Labor Statistics (BLS) reported employment gains far exceeding even the most bullish expectations Friday.  Preliminary numbers indicate that payroll employment increased by 287,000 in June.  US stocks climbed to highs on the news with the Standard and Poors 500 index closing at 2,129.90.

BONDS SURGE

US Bonds surged to all time highs Friday on BLS reports that the number of unemployed individuals in the US increased by 347,000.  The Unemployment Rate advanced 0.2% to 4.9%.

The 30 Year Bond Yield Index (TYX) closed at 21.10 (2.11%).  Levels not seen before.  Exchange Traded Fund (ETF) TLT, an easy way to trade bonds on the stock market, closed at an all time high of 143.60.

PRECIOUS METALS HIT MULTI-YEAR HIGHS

Not to be left out of the party, precious metals, although they sold off initially when the employment news was released, quickly reversed and closed at multi-year highs.

SLV, one of the ways to trade silver on the stock market,  ended the week at 19.22, up $0.48 or 2.6%.


All in all, most things did well with the exception of European and Latin American stocks and commodities (not including precious metals).

This all comes as no surprise.  As mentioned last week, the jobs number didn't really matter.  Central banks, unable to get any kind of inflation going, are desperate to stimulate the economies and continue to print more and more currencies in an effort to do so.  It's not really working but the extra added juice sure does some good stuff to the markets.

For a few years now, I've been accumulating physical gold and silver even as I watched prices fall, seemingly forever.  It's not easy for most people to look at physical things like precious metal bullion coins and not think of them in terms of their worth in dollars.  The trick in the understanding is to realize that since 2008/2009, the Federal Reserve has increased the money they have created from around $800 billion to over $4 trillion, nearly a five time increase.  Local banks, through the fractional reserve system, create additional multiples of this amount.  When you understand how much new money has been created and then consider that there is absolutely nothing that backs this currency, a prudent person would be thinking "I've got to turn this worthless currency into a hard asset as soon as I can."


A CHART TO THINK UPON

As I am always talking about gold and silver to people, the one thing I hear all the time is, what good is it?  You can't eat it.  They can't conceive that the US Dollar could be as vulnerable to devaluation as the Russian Ruble or the Mexican Peso.  The truth is, any paper currency is only worth what others accept it to be worth.  If a dollar crisis were to occur, something similar to what continues to be happening in Greece, one needs some form of money to transact daily business with.  Who knows how it can or will play out.

Throughout much of civilization, silver has been used as a currency and perhaps someday, it will again.  If it were today, and the stock market was priced in silver, this is how it would look.

So while the stock market may be going up and even making new all time highs, remember, when we are looking at price charts of the market, it is soaring based on purchases made with paper money that has no real value.  It was created from nothing, with no assets backing it up and is being used in unlimited quantities to keep pushing stock prices higher.  But the stock market, when priced in terms of something that has an intrinsic value, like silver, is in a Bear Market.


BONDS (TLT) PRICED IN GOLD (GLD)

Looking at bonds in terms of gold, this is breaking down as well.

Don't let surging markets influence your buying decisions, Central Bankers can create the illusion they wish to create.  If we do our homework, we can catch a glimpse of reality.

Dollar, Bonds Surge The World Is Not a Safe Place

The dollar surged today but interest rates, despite a very strong 5.7% increase in the GDP, fell back sharply. This means only one thing. There is FEAR out there in the world. Don't neglect the implications of the SAFETY TRADES. There is something going on. Take some profits while you have the opportunity.

Market Rumbles, Is This "THE BIG ONE?"

As Earthquakes continue to rattle the Carribean region this morning, shaky bank earnings, rising rates in China and continued weakness in the EuroFX all shook the US markets this morning. Can this be the start of "THE BIG ONE?" You know what I mean. The equity markets have been running higher and higher, non-stop since last March. Just notice how far the SP Index has run in just a couple of months? If you believe that this is normal, the you may be seriously mistaken. We have been running on fumes for a very long time; or more government stimulus and promises of eternal low interest rates. Notice though that today's market move brings the price level down to a dotted line indicating the Wilder Parabolic mark.

WILDER'S PARABOLIC

This indicator signifies trend changes. Once the price crosses through the dotted line, the follower needs to Stop-and-Reverse, meaning, sell your position and take a short position. Notice how well this indicator has worked during the two major trends in this chart. The indicator does not work well in sideways markets though. Bollinger Bands are the preferred tool in consolidating markets. Following the Wilder Parabolic would cause you to constantly be buying the high and selling the low. Thus it's important to use other tools to help you navigate the market. Still, one needs to be looking at everything and knowing the implications of various indicators.

I don't mean to be crying wolf. After all, I got out of the market in June last year and now am just utilizing interest rate and currency trades, totally avoiding the stocks. As I mentioned yesterday, my year end studies showed me nothing but overvalued stocks. I had seen this before, most notably in 1987 when I sold out and went to the Carribean for three months. My guess was correct as shortly after I left, the market crashed hard. My only exposure was to the gold market (ABX) as I thought it could be a banking crisis that would be the market meltdown catalyst.

I doubt that gold would serve as a safety trade. Again, the world flocks to the dollar.



Is it already happening? With Greece's bankrupcy threat weighing on the Euro, and perhaps other events that remain hidden, has the flight to the dollar already begun? Interest rates also are down sharply this morning translating to rising bond prices. Strong dollar? Strong bonds? Weak market? I think that the ground is starting to shake. CAN YOU FEEL IT?

Dollar Rebounds - Weekly Market Wrap

The US Dollar posted strong gains this week perhaps reflecting optimism in the economy. Or is it that the dollar had just gotten oversold and other asset classes such as gold - overbought? Or did rising interest rates cause a move back into the dollar.



Utility stocks moved higher, with the index being the star performer of the week, gaining close to 4%.

Major US stock indices closed slightly higher, maintaining the year's. Foreign stocks, hard assets and bonds moved lower.



WINNERS AND LOSERS FOR THE WEEK

Ultra Short Bond ETF

The Julian Robertson interview on CNBC reminded me of how much I wanted to be short the bonds but with so much government intervention, I have been shying away except in the core portfolio. I'm not convinced that rates have hit a low point and a big move down in stocks is likely to push rates lower as the fear factor enters into the market. But the risk that China stops buying our bonds is a real fear. And, once the Federal Reserve stops propping up bond prices, who knows what might happen.

I have been out of TBT in my personal account until just now however in the core portfolio, established at the beginning of the year, our TBT position is up more than 21%!

TBT is the ultra short 20 year + bond position. For every 1% bonds move down, this instrument moves up 2%.

Markets Await Unemployment News

Interest rates continued to rise overnight in anticipation of improved unemployment numbers. The most positive estimates project that under 500,000 jobs were lost in the previous month. Normal numbers have been coming in minus 600,000. Today's estimates peg a loss of 520,000 jobs. The 10-year rate hovers around 3.75% now, the same rate that existed back in November, before the real fall in rates occurred. Rates last year, on this day, were 4.05%. In contrast, the Dow was 12,600 and the S&P 1,404. Gold was around the 865 level.

Which Market is Right?

I began looking that the relationship between rates and stocks in 2005 and saw a big disconnect at that time. In normal times, we can see rates and stocks highly correlated. When we had the big correction in stocks several months ago, stocks and rates were at the same point. Now, we see stocks getting ahead of rates again. Which market is right? How will this be corrected? And when? The unfortunate solution however is that both stocks and bonds (move inversely to interest rates) must both fall.

With such a prediction, it is obvious that your traditional money manager will not be able to help you through this correction. With both stocks and bonds falling, investors are at risk at again, taking big hits in their portfolio. If your portfolio hasn't been reviewed by a financial planning expert that has experience not only in stocks and bonds but also deriviatives to help you hedge your positions, you should find such a person soon.

Remember, DIVERSIFICATION means nothing if all of your assets are positively correlated.

Geitner Assures Chinese on Dollar Safety

Treasury secretary Tim Geitner assured a Chinese audience that dollar investments are safe. No no, this wasn't the new Tonight Show but it could have been as his comments were met with loud laughter. Anyone holding US denominated investments has to be worried as the dollar has collapsed more than 12% since March. Yet government officials continue to tell us that we support a strong dollar policy. The laughter underscores the tremendous level of cynacism that many are starting to have towards the US and their policies. They simply are not believable.

The following chart shows the Commodity Research Bureau Index (CRB). While the Federal Reserve and Treasury are worried about deflation, the CRB chart shows a totally different picture. Since March, commodity prices have risen more than 18%. Keep in mind, oil prices, while rising, are not near levels we saw last year. Prices of everything, across the board, are soaring.

The New Bubble

Can we be seeing anything other than a bubble? Are we getting way ahead of ourselves here with the market? Is there there too much money out there looking for a home? President Obama told us that his administration is going to eliminate the "bubble" economy but again, all we see is boom and bust.

Again, I see prices rise at a dizzying pace and even though I have been on the right side of the market and have made profits in excess of 25% on oil and other investments, this isn't investing. I feel like I'm at Vegas. And you know how it is in Vegas, if you don't pick up your chips and walk away early, the house will take your money. I feel that we are in this kind of situation now.

With this in mind, I took profits on oil, gold, ag and my short bond position. I went long 10 year notes and am looking for a home for a ton of cash. But will the dollar keep going down forever? I expect some kind of bounce soon. My fear is that we are just seeing one-way markets. We don't see the pulses of a rhythmic market. We only see mass emotion piling in billions of dollars going one way and then when the plug is pulled, billions of dollars exit en masse. Higher prices beget even higher prices and lower prices beget lower prices.

Our philosophy here is to manage money by objective. If you need 10-12% a year to achieve your long-term goal, it is better to manage your portfolio using stocks and hedging instruments in such a manner that you can have a high degree of achieving your rate of return objective with minimal volatility. Slow and steady always wins the race. Those who want to constantly play this super-risky market hoping to get rich quick always find themselves busted. The house always will take your money.

Don't be afraid to take a profit. Know what your return parameters are, take your money and keep it safe. If you've got extra "house money" to play with, use that to "rock and roll." Use futures or options on futures to have fun. They are fast and tax-advantaged.

Notes, Bonds Surge to Continue?

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

The stock market also tried to test the lows in March but failed. While the market has rallied since then, it has not risen above previous lows and my feeling is, an untested market is an unsafe market. Our stock portfolios have been 35% in cash and many investments have been in equities that are sensitive to the decline in the dollar such as gold, oil and the Pro Shares Bearish Dollar Fund (UDN). Other stock positions have been established as buy/writes at the beginning of the year. Volatility was so high at that point that almost all of our stocks would be able to weather a 35% decline in the stock price without our position losing money.

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 (POT) is one example of a stock that is powering ahead. Notice how this stock also made the important three-month test of the low. The stock has nearly doubled from the testing point. It demonstrates the validity of the basing process that I have been discussing over and over again. You don't need to pick the absolute bottom to make a ton of money. I can sleep much easier when I see such a test of the lows be successful. And when I have doubts, I sell a long-term call option against the position. Most of the buy-writes that we put on at the beginning of the year stand to make a 50% profit should the stock price rise or do nothing. Those kind of returns are pretty good. And the option sale gave us extra income to hedge ourselves on the downside should the market go against us.

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.

Mid Month SP Rates Review

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.

Producer Prices Up 0.3%

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.

Poor Sales Sink Rates

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

Despite claims by many that the decline in housing prices may be near an end, Reality Trac reported that households receiving foreclosure notices rose by 32% in April April Foreclosures Rise. Suddenly all of the Wall Street optimism is beginning to fade and again, reality is starting to set in.

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.

Rate Volatility Increases Despite Lull

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.

Looking at the daily chart, we appear to be right in the middle of a large pennant. The weekly chart we posted earlier today showed the potential for an up move, bouncing off of the four week average. There is heavy overhead resistance illustrated in both charts.

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 Setting Up For Surge

Rates have been moderating since last week's surge. Did the Fed intervene? Are rates moving too quickly?

On a weekly chart, we can see that there is still a strong upward trend that the rate is resting on. The line comes in at 3.16% on the 10 year rate. In recent posts, we have identified similar situations "inter-week." Rates always seemed to rally from this trend. We will be positioning ourselves appropriately,

If you wish to see the trades we make and our track record, the results are posted however you must be a Trendsetter subscriber to get the password. The subscription is currenly free.

Dollar, 10 Year Futures, Remain Under Pressure

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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!

KUDOS TO REPRESENTATIVE GRAYSON

Seeking Alpha article with Rep Grayson YouTube.

Take a quick look at Rep Grayson's You Tube video about Federal Reserve oversight. Truly scary. I took the time to look at other Rep Grayson's YouTube offerings and was pleased to see one of our elected officials who realizes that we are being robbed! If you get a chance, look at his video where he questions Citi boss Pandit over the US taking 90% of the risk of Citi's bad debt. Pandit says that he bought "insurance" from the government. Despite the mess Citi got itself into, I believe that Pandit still made $100 million last year. Well, he got the US government to take 90% of his losses, I guess that's worth something.

Market Strengthens, Rates Rise

Dow Futures indicate a gain of 50 points when the bell rings this morning. It's hard to say what news is driving today's gain. General Motors reported a quarterly loss of $6 billion, compared to a loss of $3.3 billion a year earlier. Yet analysts were cheered that GM's loss was only -$9.66 per share instead of the expected $11.05 loss. Are we setting the bar too low?

Interest rate futures dropped sharply but quickly rebounded on optimism of a strenthening economy. While rates have waivered over the past week, the continuing strength in the stock market and additional $100 billion in treasury securities coming to market each month support increasing rates. It seems that even the worst news is turning out to be "better than expected." Still, there are others who expect things to get much worse going forward Dr. Doom Says Stress Tests Lack Credibility

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.

"The Worst Is Over"

"This rally continues," Steve Massocca, of Wedbush Morgan Securities, told CNBC. "It's pretty clear that the worst is over for the economy right now."

The stock market rallied again today, setting the stage for the eighth consecutive week of market gains. The market started the day strong as Pending Home sales increased by more than 3%. Among other positive news: AIG said it doesn't need more money and construction spending rose. On the downside, more consumers were late on their credit card payments. Continuing unemployment claims are seen increasing.

Interest rates responded less enthusiastically to strong market sentiment and drifted sideways to the trendline. As I suggested this morning, it's possible to see a fallback to the four week moving average at the 3.04% but several attempts to break rates below 3.15% failed. It appears that rates may break higher tomorrow.

More to come in my morning report.

Possible Rate Retracement

Rates have had a nice runup over the past several months but may be due for a little backing and filling. A logical place for the 10 year rate to fall to is the 3.04% level. Notice how this point meets the rising 4 week moving average. It also marks the previous closing high set several months ago.

Rates have the potential to decline even more depending on how the market reacts to the bank stress test results and the much awaited unemployment report. We all know the numbers aren't going to be pretty. The unemployment number has the potential to really rock the world though since a major assumption in the stress test review is the future unemployment rate. Should the unemployment number indicate that the government's worst case unemployment scenario is too conservative, rates could drop significantly.

Until further evidence shows that rates will again continue in their major decline, I'm still looking for much higher rates in the future.

One must try to understand what the Fed might be thinking as well. Their note and bond purchases have not met the market's expectations. Does the Fed think that rates will fall on their own? Or are they looking for higher levels to sell at?

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