BOND MARKET YIELDS FEW CLUESAny prediction on the direction of interest rates based on fundamentals is inherently flawed by the nature of our monetary system. In order to predict the direction of interest rates, you need broad insights on the world economy and you need to know how central bankers, speculators, and foreigners will behave. This is pretty much an impossible task to perform with any measure of reliability. Those who have such rare insight, usually have personal and professional interests that go beyond their altruistic instincts to help the public by sharing their thoughts. In addition, their predictions may be dead wrong in spite of an exceptional analysis. It is for this reason that technical analysis is a valuable tool for establishing the future direction of interest rates.
Even though signals can be a bit late, charts don’t lie, and when they do, there are signals that tell you when the analysis becomes erroneous. Charts don’t talk up “their book”. It is with this in mind that I would like to present a short analysis of long interest rates.
The chart below dates from 1960 to the present, and shows the 10-year Treasury note yield. There are two key trendlines that dominate the entire 46-3/4 year chart. The first is the linear uptrend in long interest rates from 1960 to about 1982. In 1982, the long term interest rate went into a bear market that has lasted until recent years. In mid-2006 the long term trendline on the 10-year note was tickled, and then it whipsawed bond bears. Before moving on, please examine the right edge of the long-term chart beginning in mid-2003 (3-1/2 ticks from the right edge). Does it appear to you that the 10-year note interest rate is heading down, or up?
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This can be observed more clearly in the weekly chart below that dates back from 1990 to the present. It shows 2 of the 3 sharp corrections annotated in the longer chart above. The last 2 rallies between lower and upper channel lines (shown in red), were of about 1.25 years duration. However, since bottoming in 2003, the rally to the upper channel line has lasted over 2-3/4 years, more that double the duration of the previous channel trips. I suspect that the downtrend in long term interest rates ended in 2003, and since that time, rallies in interest rates have become longer in duration. Yet this supposition will not be confirmed until the long term (down) trendline is broken decisively.
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Today’s Market – No Legitimate Reasons to Sell
The bond market did little today. The stock market rallied broadly with speculative and highly shorted sectors leading the way. Homebuilders reached levels not seen since June and this action is sending a signal to traders that you aren’t going to short stocks based on fundamentals. There’s similar action with stocks such as Eastman Kodak and General Motors.
With the indices rallying with barely a day of minor pullback, it is clear to traders that if you are long, there is no reason to sell. From a technical perspective, practically all trading systems are based upon waiting for a trend to reverse before selling or moving to the other side of the trade. So in short, there is simply no technical reason to sell either. Folks recently received their 401 K statements, which were by and large, highly bullish for the summer quarter. This is more reason for the public to chase the rally, but it is certainly not a reason to sell. Earnings season is upon us, and this brings corporate America to the mike to put their respective company’s best foot forward (while they claim special items and one time events). Outlooks are likely to be rosy again although, this time the disclaimers may actually come into play in a few months. Again, this is another reason to buy stocks; but not a reason to sell. If this isn’t enough, it seems that every day there is another Fed governor giving a speech covered by the news services discussing how great the economy is doing, and how it is due for a soft landing. Again - no reason to sell. This is the stuff of a rally that is feeding upon itself, and will probably only exhaust itself when there is no one left to buy. In this suddenly bullish environment, the chance of a parabolic up move must be considered by owners of stocks and again, there is no reason to sell because you might miss such a bullish parabola (remember the 2000 Nasdaq?).
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