Darshan's Blog

Darshan's Daily Market Ponderings

What Are The Bond Markets Telling Us?

Tuesday 24th November, 2009

Morning all!

Well well well, we held that confluence of resistance at 10495 yesterday perfectly and that was the high of the day. So I hope you did sell into that sweet spot. Now yesterday was definitely interesting for many reasons, because the markets had every chance to bust through that, if they wanted to create a fierce short covering rally...and believe me that is what will happen when that area is broken; A lot of buy stops will be triggered and that will be the rocket fuel for the Xmas rally.

However, of course in the meantime, the moves yesterday and the reaction to that resistance zone the first time around - followed by the heavy sell-off (3.5% sell-off!) in the Shanghai index overnight, is kind of a clue that we could see a sell-off before new highs. In addition to this the CPC reading is bearish and the biggest clue of all? Same as two weeks ago - while the Dow was pumped up, the rest of the indices did not confirm the move up. In other words, yesterday was not broadly bullish at all. However, with low volume, the big money can do what it wants this week.

Remember there is support in between 10200-250 and then maybe we hit the bottom of the channel at 10050 over the next few days. The markets have not really reacted to the US Prelim GDP figures which came out at 2.8% growth for the third quarter...but then again, nobody expected much of a reaction. If you thought volume yesterday was low, then it's going to be even lower today. Really this week is going to be about traders taking it easy in the USA, as they prepare for the holiday.

Overall, there are just too many signs supporting both sides of the coin in the short term, with a leaning towards the likelihood of a pull-back on the indices but the main price we need to watch, is a break of 10495 on the Dow. If that can happen and it can be supported by new highs from the SPX and the Russells, then we are game on for the final hurrah. If that resistance holds, it merely means that the market makers are wasting time before the big players return from the holidays and so in both scenarios, once your shorts are in profit, trail your stops! Don't become a victim of a bear squeeze.

Aside from that, the main worry seems to be that we got more warnings of deflation kicking in. The 3-month T-Bills hit zero last week and the 2-year T-Bill fell below 0.7%. Compare this with the 30-year mortgage rates which stand at 5.02%. What does this mean? Well as I have said some months ago now, nobody is passing on the lower rates to homeowners. Without this happening, how can consumption in the US increase in a sustainable way? What about the Option ARM resets due over the next two years? If borrowing costs for households remain this high and just get higher, then this entire rally is built on dust This whole mess is getting bigger behind the scenes and the man in charge, Bernanke is not acknowledging it. This move in bond yields, show that major investors just do not believe in the recovery story. When the Fed Chairman himself, is refusing to accept that the liquidity increases to banks are causing asset price inflation in a deflationary environment overall, then you have some serious head bashing to do.

I guess what I am trying to say is that, the bond markets are sending warning signs and the equities bulls are ignoring them. That, along with the USDX really working hard to build a support base, means that we are ever closer to a reality check. Which way are you positioned? (The correct answer is, you are offloading your longs into these rises). We only have a few more percentages left in this game of lies. (Just to reiterate, I will be looking to scale in my shorts once we hit 10550-600 on the Dow, 1130-50 on the SPX and 5500-600 on the FTSE 100 - not doing so, would be silly - protect yourself with puts, because when the brown stuff hits the fan - last years drops will look like a walk in the park)

Stay safe and personally, if you can, just take the week off!

Happy trading,

Darshan

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