S&P Breakout?

Stocks appear headed higher this morning on news that China's manufacturing has expanded for the third straight month. Markets world-wide rallied while the Dollar and Bonds continued their declines.

Oil continued to surge, up over $1 moving in on $68. The dollar broke below 79 on the Dollar Index while 10 year rates rose to 3.59%.

Our plan is to sell S&P calls at overbought levels above 933. We remain delta neutral on the 10 years and await the Fed to come in and push down the rates before we reestablish short positions in Notes and Bonds.

Consumer Confidence Improves

Consumer Confidence rose to 54.90 vs 40.8 in the previous month. Ten-year rates rose above 3.45% while the Dow Average is rising 100 points to 8380+. We are looking for a test of the 8575 level on the Dow this week.

In other news today, the SP Case Shiller Real Estate Index showed that house prices continue to fall. The 10 city index fell 18.6% year-over-year. Markets did not react to this news

Rate Panic Hits Market

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.

Market Awaits CPI Data

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.

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.

Market Rally? A Matter of Perspective

We are just minutes away from the stock market attaining it's 9th week in a row with a gain! Markets have not had so much momentum since perhaps the bull runs of the late 1990s. But while US investors may be smiling as their 401(k)s expand close to previous levels, those outside of the US may not be seeing such gains.

US market gains abroad are definitely beginning to be muted by declines in the US Dollar. Today's downward move in the dollar is the second day in a row that markets received a wake-up call as to the US Government's fiscal policies. Yesterday, bond yields rose sharply as investors demanded higher yields on long term treasury debt. Higher yields normally result in a stronger dollar. Not so today.

While President Obama's economic stimulus package my ultimately benefit the country, it will not be without substantial costs. Inflated money supplies and record debt levels may cause a run on US securities resulting in lower prices for US products across the board. Don't leave yourself unprotected. Be sure your positions are hedged appropriately.

Rates Blow Through 3.2%

A worse than expected 30-year treasury auction today sent intermediate and long-term rates soaring today. Ten year rates blew through the 3.2% level. Two weeks ago, I discussed potential resistance at the 3.20% level and after that resistance at 3.35%. Rates approached this level before backing off slightly to close at 3.295%. I had been watching the past couple of days for a test of the highs and was expecting a breakout to the upside. Rates tried to break down on the Bank of America capital requirement report but quickly returned to the 3.15% level. Rates then tried to go higher but with limited success. This morning, unemployment claims came in a bit lower. Still, weekly claims remain high but the momentum is waning. This brought rates up through the 3.25% level.

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?

Most certainly, higher rates are the one thing that the Federal Reserve was trying to prevent. Will they now move into the market aggressively to force rates down again? This is always the wild card in the bond market. Higher rates will certainly have a negative impact on the market. And those who escaped the stock market and went to bonds might yet again get their heads handed to them. How many heads can you lose in one stock market cycle? In the end, while rates may come down as they are well overbought at present level, one still needs to be playing rates to go higher and the dollar to go lower.

The stress test results come out in 30 minutes. How will the government manage this report to help push rates down? It will be interesting.

"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?

The May edition of Trendsetter is now available. Write me at gary@assetdesigncenter.com to get on our mailing list.

Volatility Plays Provide Gains

VOLATILITY THE KEY TO CONSISTENT GAINS

As I mentioned in previous blogs, Volatility is a key indicator that needs constant monitoring. When markets are trending, my volatility measure advances. The rule is to stay with the trend. When Volatility begins to lose strength, there is a good chance that the price movements will lose their magnitude. The move runs out of energy. In times like this, you can take advantage of the lull by selling options. By selling options, you can lock in some of your gain and get paid for the time value of the option. For the most part, you will only see me selling options in my blog. More about this in the future.


BLOOMBERG ARTICLE

“Big currency moves are behind us,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, with C$120 billion ($98.6 billion) in assets. “The volatility spike has to unwind itself over time. Selling volatility has been the winning trade so far this year and will continue to work well.” Bloomberg article.



READ FUTURE BLOGS

Follow my trades and you will learn what it has taken me 20 years to learn. While there is some "feel" to trading that can only be gained from years of experience, one can easily learn and master the tools needed to time your transaction.

Are Interest Rates Bottoming?

Poor Retail Sales Hit Rates

Gary Lewis

Asset Design Center

After weeks of optimism over improving bank earnings, reality slapped investors back to reality with worse-than-expected retail sales numbers in March. Interest rates, which had been climbing prior to the data's release dropped sharply as sales numbers came in at minus 1.1% instead of the plus 0.3% that economists were expecting.





I had mentioned two weeks ago that while I expected rates to rise sharply, there would probably be one pullback. We had sold short put options and bought call options in anticipation of this move.

With rates dropping down to 2.81%, and June 10-year notes rallying to 123-14, I covered the short puts and sold the long calls. The position is now bullish for rates and bearish for the Treasury Notes.

As you can see from the chart above, while we didn't realize the three week test of the low, we could be none-the-less finding support at the trend line shown in red. The week is still young though and how this chart will look at the end of the day on Friday is anyone's guess. Perhaps I am early with my position shift but with more bank earnings and other data due out the rest of the week, markets could turn in an instant and move sharply.

We see this morning that Goldman Sachs earned billions of profits in it's last reporting period. With all of the money that the government has pumped into banks and all of the losses that were avoided by AIG paying off banks such as Goldman Sachs in full, one has got to expect some spectacular earnings numbers coming out. Strong numbers SHOULD reflect in higher interest rates UNLESS the market sees through the market manipulation. Still though, the charts indicated that rates should move higher. Whatever news will drive this is anyone's guess. Perhaps in the end, too much additional government debt will come home to roost and investors will demand more return to compensate for the increasing risk.

FED to buy Treasuries

As mentioned previously, the possibility that the Federal Reserve Bank would enter the treasury market to drive down rates and increase liquidity in the system was a strong possibility. IT HAPPENED!

Today, B. Bernanke, Federal Reserve Chairman, announced that the Fed would go on a spending spree, buying $300 billion on long term treasuries as well as purchasing mortgage backed securites.

Treasury securities rallied sharply. 10 year government rates fell below 2.5% and 30 year rates fell below 3.375%!


It's not a fair market! While we were positioned for this and recommended to be long in the interest rate instruments short term, the long term damage that the fed is doing will only drive the US into ashes.

Accompanying the bond move, the Dollar fell sharply against major currencies.

The basic investment premise put forth at the beginning of the year still holds true. While bonds look like they will continue to rally as the government is going to buy buy buy, look for opportunities to take positions in the TBT (Double Short long term bond ETF), currently at 44 (we entered into this initially at 37 so we are still not adding to our position here). But you should take a position in the Short Dollar Exchange Traded Fund (ETF) (Symbol UDN) currently 25.45.