Key Reversal May Mark TOP!!!

Notes and bonds rallied sharply on weaker than expected housing data on Wednesday. By day's end however, long-dated treasury securities like the 10 and 30 year instruments were down, closing the day's trading session at their lows. Probably lots of the move was a result of the Kansas City Fed President's disagreement with the rest of the board that interest rates should remain at low levels.

In evening trading, note futures are down 8 1/2 ticks while bond futures are off 14. This could the beginning of the end for the bond rally. We went short at 117-24 for the notes and were tempted earlier today to add on as the notes topped the 118 handle. But no additional trades were established.

Flight to Quality Gives Opportunity?

The 10-year Auction today was a super success as foreign banks flocked to the security of US Treasuries. Demand was very strong and the yield came in at 3.365%, much lower than the 4% level the market was trading at only a couple of weeks ago. Rates plummeted across the board and the 30-year Treasury fell below 4.2%. It had recently been trading as high as 5% several weeks ago.

With rates backing down on the 30-year note, the Ultra Short 20+ Treasury ETF has fallen about 20% from the highs. While the flight to quality is in play again as the economy continues to be in a horrid shape, down the road, we expect interest rates to be much higher. With hundreds of billions more of debt coming into the market, eventually, reality will set in. Also, should the government again consider providing another bail-out package, financed with even more debt, interest rates will surely soar.

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.

Rates Pop in Delayed Reaction

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 Remain High

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.

Jobless Claims Expected to Moderate

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.

"There Will Come a Time"

"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
China Cancels US Credit Card, Kirk, a co-chair of a group of lawmakers promoting relations with China, said that China was discretely shifting investments away from US denominated Treasury Securities. Kirk further said that China's concerns were legitimate.

We have noted in early reports how China has been less than discrete at times concerning excessive US debt levels as well as the expanding US money supply. China has been diversifying away from US investments, investing heavily in other Western Hemisphere countries. While they have continued to participate in treasury securities purchases, they have focused more on short termed maturity paper, moving away from longer-termed debt issues.

This week, the US markets, received quite a wakeup call even while stock prices were rallying. Both long term bonds and the US Dollar fell sharply. Our mantra for the year has been to be short the dollar and bonds and long oil, gold and commodities. We are going to review our positions this weekend now that momentum might be starting to develop. Until now, the dollar has been considerably strong as have long term bonds, despite the heavy monthly supply of debt amounting to more than $100 billion per month!.

For those, especially outside of the US, with heavy US dollar exposure, it could be time to review your risk parameters and consider applying hedging techniques to protect your wealth.

Rates at Highest Levels Since November

Rates on the 10 Year Note soared to 3.387% just prior to the release of today's unemployment announcement. While the job loss number was a "better than expected" 539,000, much of the improvement was due to government's hiring of 72,000. The unemployment rate now stands at 8.9%. Last month's unemployment level was revised to 699,000!

Rates are currently at 3.3% and one has to think that the Fed might be starting to get nervous. The whole point of their adding liquidity to the market and to be buying back long term securities is to force rates down so that those with adjustable rate mortgages and fixed rate mortgages at higher levels can refinance at lower levels, instead of defaulting and losing their home. The unemployment number, while cheered by the analysts as "improving," still leaves more than a half a million new people without jobs last month. The optimists stress that there are new jobs also being created but the unemployment rate increased from 8.5% to 8.9%. How can optimism prevail?

Rates are back at the November levels. This is when the market really started melting down! Are we already out of the woods with this economy? Does the Bank Stress Test show that the world is safe from further disaster? Rates are more than 1% off the lows. Consider that each 1% of interest equals $1,000 per year in extra interest that one will have to pay on a $100,000 mortgage. For a $200,000 loan, that amount doubles to close to $200 a month in extra interest. Also consider that credit card rates have already risen and now will rise even higher! It's plain to see that we are again on the road to disaster. The economy is being sapped by the banks.

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.

New Mortgage Applications Rise

NEW YORK, May 6 (Reuters) - U.S. mortgage applications rose last week even as interest rates jumped to their highest levels since mid-March, data from an industry group showed on Wednesday.

Demand for home purchase loans, an indicator of home sales, far outweighed that for refinancing. The increase may help gauge how the hard-hit U.S. housing market is faring this spring, the peak home buying season.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications , which includes both purchase and refinance loans, for the week ended May 1 increased 2.0 percent to 979.7

See Complete Article

ADP Report Better Than Expected

The ADP Jobs Report showed losses of only 491,000 jobs, much less than was expected. Interest rates reversed after popping briefly overnight on the Bank of America capital requirement story reported by Reuters.

Rates are now testing the recent highs of 3.174 and could be setting up for a drop. Rates have rallied from the 2.53 level on March 18, when the Fed announced the $300 billion long-term treasury buyback intention.

The stock market has turned around and is now up close to 1% in premarket trading. Dow futures were down close to 1% overnight on the B of A report. The talking tv heads are smiling with optimism over Friday's unemployment report. Expectations are now set for better than expected results. Most of the stress test news has been efficiently leaked without too much impact on the markets. Momentum continues in favor of continuing rises in rates but the sentiment that not so bad is good may come back to bite.

Futures Pop on B of A Report

10 Year Treasury Futures popped briefly after Reuters News reported that Bank of America will need $34 billion in new capital based on US government stress test results.

The futures backed off a little and were trading at 121-03 at 10:20 pm CDT.

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!

Note Rates Hit 3%

Ten Year Note rates tested the 3.00% level at the end of trading today marking the first time rates have touched this level since the Federal Reserve announced its long-term security purchase intention. Rates continued advancing despite continued weak economic news. Durable goods orders again slipped. Orders data has fallen now in seven of the past eight months.

Concern exists over how the markets will react to an additional $100 billion + in new securities being auctioned off next week. Of this amount, some $30 billion of debt will be in the 7 year, intermediate range.




We had been watching the rising trend in rates. In earlier blogs, we noted that rates were testing the red channel line and mentioned that we were positioning ourselves for higher rates.

Rates tried to fall today after the 1 pm CDT release of the Bank stress test results. Little information was provided on banking weaknesses and the market tone weakened. Stocks gave up much of their earlier rally and treasury rates headed down. But in the final 15 minutes of trading, rates rallied trying hard to penetrate the 3.0% level. Today marked options expiration day for the May Treasury futures making it hard to distinguish what was real market movement as opposed to activity targeting a certain strike price. A popular option strike price was 121-16. Note prices touched 121-165 before finally settling at 121-175.





We believe that the upward move will continue. The Weekly Size chart above shows that volatility is starting to rise. When Size is rising, one should stick with the trend. The moving average on the Size chart is 0.24 while the latest data point is 0.12. Volatility can at least double from the current level.

A longer term view of the note rates show that there is a significant falling trendline that comes in around 3.20. Note rates have not had much success in getting through this resistance level since the downtrend began almost two years ago.




Should rates break above the 3.2% level, expect some resistance at the last low of around 3.35%. While resistance levels could be important, one must consider the magnitude of the move that we have endured. Rates have fallen from a high of 5.2% to a weekly closing low of 2.13%. Note how the stock market has made a major move in the recent two months perhaps only because it has been so oversold. Interest rates, having fallen by so much, could easily rally sharply, retracing much of the down move.

While the Federal Reserve may intervene to keep rates lower, the increasing debt supply, over $100 billion each month, is sure to eventually take its toll on rates. The global market is much bigger than the Fed. While we will have to see how rates react when hitting the 3.2% level, I will continue to position my trading stance for higher rates.

Rates Rise - Where's the FED?

Prices on the June 10-year Treasury Note contract fell today as economic data was not as bad as expected. Also exacerbating the situation was a lack of buying on the part of the Federal Reserve. Notice the big spike up several weeks ago when the Federal Reserve announced that they would buy $300 billion of long term treasury securities. With the exception of the recent pop in prices that we predicted in earlier blogs note prices have since been retreating and are almost back to the Pre-Fed announcement levels.


I was a day early in our closing out the short put positions. Today I was happy that I had closed out the short puts the other day. Today I was in a good position to sell puts for a good premium. For risk management sake, I only have one short put and one short call position for each $10,000 invested.






Currently, the 10-year rate is at 2.94 at 12:45 central time. It is breaking out of the pennant formation and could advance on to the top of the price channel. By selling some out of the money puts, I'm am betting that the rate will back down into the pennant by the end of the day. Still volatility levels are low and even with all of the supply concerns and good earnings reports that are coming out; it's important to keep in mind that bank earnings might the products of manipulation and are not as good as they are now appearing. While rising interest rates (and falling note prices) indicate that the economy is gaining strength, I'm not quite yet buying it.

Bond prices might rise early next week one more time before falling. I wonder though how high the Fed will allow rates to rise before stepping in to drive rates down. While I expect rates to rise much higher in the long term, the threat of Fed intervention is always present. While this is disappointing for trend followers, it should present good trading opportunities. As such, with stochastics at the low end, I am taking the chance that prices will rise from current levels, providing a profit opportunity for the new short put position. I will also have the opportunity to establish a short June call position since the May options expire next Friday.

Interest Rates Set For Upmove

INTEREST RATES SET FOR UPMOVE

Monthly Report - Part 2

Long-term interest rates fell in March but as the chart of the 10-year interest rate index (TNX) illustrates, the rate found support at the 4-month moving average and appears to have successfully completed a three-month-test of the lows. With this in mind, we need to be looking for an entry position to be short treasury bonds and notes. For those with a heavy bond allocation in their investment portfolios, be sure to have your adviser monitor this and shift out of long term bonds to a shorter maturity or cash.

On a shorter-term outlook, the 10-year rates appear to be continuing to head lower so you may wish to hold off before making a decision. I will watch it closely so you can monitor the blog to see when I take action. As the weekly note rate chart below shows, the rate has been hitting overhead resistance and appears to be headed lower.




Lower rates seem to be the normal thought now as employment numbers continue to worsen and the potential bankruptcy of General Motors and Chrysler weigh heavy on the market. First quarter earnings will be coming out as well. While few have high expectations for improved earnings, reports coming in at worse-than-expected levels could send shivers through the Treasury markets, especially considering the rosy reports banks were giving recently, telling the public that January and February were profitable months. The final wildcard is the Fed. What kind of impact will their purchases add on rates?

The weekly chart illustrates the persistant downtrend on rates with significant resistance coming in at the 2.83% and 2.91% levels making it hard to reconcile the monthly chart showing the potential for a directional change in rates. But it could happen. In general, the treasury market is spooked by the heavy supply of bonds, notes and bills that are continually coming into the market to support the trillions of dollars in spending that President Obama is proposing. When this thought prevails, rates rise. Another factor that cannot be ignored is the G20 meeting that is about to get underway in Europe. News about the dollar could have an impact on rates.


VOLATILITY LEVELS LOW





The volatility level for the 10-year note continues to drift lower and lower and is currently well below the average. For bond and note option premium sellers, this low level of volatility needs to be taken into consideration before selling short. Not only does low volatility translate to low option premiums, there is also the risk that a volatility spike could turn your far out-of-the-money options into in-the-money positions.

I will be watching for a bottom in the rates. At that time, you could consider a number of instruments to take advantage. For stock portfolios, consider the Short and Ultra Short Bond ProShares. These instruments will rise in price as interest rates rise. For well-capitalized players, consider entering into a short 30-year bond or 10-year note futures position to maximize your profit potential. For those who wish to make some money with less risk, consider selling out of the money bond and note call options.

Be sure to work with a futures investment professional to advise you on such strategies. Futures trading is very risky but when done right, can give you great profits in any kind of market.

OUR MARCH OPTIONS RESULTS

Despite the low level of volatility during March and the sharp move in price caused by the Fed’s announcement to buy long-dated treasuries, our futures options trading positions returned $915 per $10,000 investment net of transaction costs. I enter April short options with a bias to the upside for bonds. I will be watching for a reversal soon and expect bonds to fall by the end of the month.