Saturday, June 14, 2008

Bonds and Stocks -Technically speaking....

While bonds are approaching their value level they may not be quite there yet. The 10-Yr note at a 4.27% yield (Constant Maturity Treasury) seems to have formed an inverted head and shoulders pattern. As required there is a pre-existing down trend to the formation of the pattern and high volume on the right shoulder portion. This past week the the yield chart tested the right shoulder and the pattern held as yields catapulted higher off resistance. So now the 10-Yr note's objective is a yield of about 4.50%.

As for stocks... in the past few weeks the DJIA, which is below its 200 day moving average, moved up twice to kiss that average and to head back lower each time. Yes, it's ground hog's day for equities. That action does not seem very constructive for the future. In mid May the S&P also hit is 200-day moving average and moved lower. Both those charts are looking like they have seen better days, despite ongoing bullishness we still seem to get from many market commentators.

Future paths
Both the 10-Yr note and the S&P 500 charts have seen their 200-day moving averages drop out of the trading channels they had been in. That signal usually means a new channel in a new direction. These signals imply that the 10Yr note is probably still forming a move lower in yields and that the S&P is going to see lower levels ahead since it is leaving its bullish channel behind.

As such, both of these charts are consistent with the idea that the economy has weaker days ahead.

The 10-Yr note gives us two opposite signals, but they may not be as much inconsistent and they are inter temporally distinct. The longer term signal says the dropping yield trend is still the major trend. The head and shoulders patterns says there is still more upside before yields turn back lower.

These notions are consistent with what the Fed is doing since the Fed is threatening to hike rates if the economy is too strong and if that results in an inflation build. If the Fed does not need to hike rates it will be because weak growth has relieved it of inflation pressures.

Bullishness on stocks and true bearishness on bonds are views that are the same as trying to trying to draw to an inside straight in poker- low probability bets. While those events could happen it is looking increasing like a weaker economic result is brewing, either due to Fed inducement or due to the economy's own loss in momentum.

If you like the inside straight scenario you must believe that the tax rebates will work but that they will still permit inflation pressures to abate. it will take an improbable tender balancing of forces to get there from here.

1 comment:


High yield bonds or stocks its a close call.