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Even though the bond market seems to be directionless in the intermediate time frame, a look at the long term chart suggests that the character of the bond market may be changing. Since the top of the interest rate yield of the 10-year note in 1981, interest rates have been in a secular decline. During this decline, cyclical rallies in interest rates have been sharp and of relatively short duration. Yet since the 10-year note rate bottomed in mid-2004, interest rates have risen at a slower pace. In addition the general trend of higher lows and higher highs since mid-2004 has been of longer duration than the approximate 2-year duration of the former longest rally in the 10-year note rate.
In spite of this potential change in the character of the bond market, no major trendlines have been broken (yet). A look at the 4-year weekly chart shows that although the 10-year note yield appears to be “lighter,” the market is now consolidating in a progressively narrower range, which has generally been between 4.0 and 4.5% since October of 2003. Stating the obvious, a break above 4.5% or below 4.0% will be meaningful for the bond market. If the 10-year note yield drops below 4%, it would likely be a result of an economic slowdown. Similarly, a break above 4.5% on the 10-year note would not be good for the consumer-based US economy either. Interest rates need to remain in their narrow trading range to support the selling of the “Goldilocks” economic scenario to the US public.
Supporting the case for higher interest rates is the recent and steep uptrend in Japanese stocks which tend to trend in the same direction as interest rates. Supporting the case for lower interest rates are the up-trending utilities, which typically trend in the opposite direction as interest rates.
Homebuilders and home finance companies have bearish trends in progress perhaps suggesting higher interest rates in the future.
Will Gold Pull Back? While the interest rate trend has no clear direction, gold has moved into new high ground in a manner that is easily understandable and clear. It is in an uptrend as shown in the 3-year weekly chart.
The up trend is obvious and gold’s adherence to technical analysis principles during its long-term linear uptrend suggests a key technical level ($457) that is well worth watching in the near term.
As shown in the daily chart, Gold has broken its former high at about $457 over the last 2 weeks. This technical resistance break likely may have traders anxious to enter their long positions around the $457 former resistance level that is now potential support. In addition, as shown in the RSI indicator, after being overbought, the RSI is now below 70 (as of Wednesday evening). There may be legions of traders waiting for the apparent inevitable pullback in the price of gold to buy. Yet if the recent action in gold represents a fundamental change such as the next major up leg of its bull market, then the technical pullback to support may fail to materialize. If the pullback to support does not occur, this would be especially bullish for gold in the intermediate term. While a failure to produce a pullback to former resistance wouldn’t be the most likely technical behavior, such a failure may confirm other evidence pointing to the beginning of Wave 3 of the gold bull market. A pullback to or even temporarily below support may be a low risk entry point to buy. There’s some action in the Gold Bugs Index ($HUI), which also suggests that the character of the gold market may be changing. The HUI has been in a well-defined trading range since November of 2003. Two times before, the HUI reached the top of its trading range, only to be quickly turned back. Yet this time, the HUI is consolidating at the upper end of its trading range. Is this suggesting a positive change of character in the gold market?
There is similar action in the XAU.
These two indices deserve attention. A failure of the XAU at the 110 level may signal a downward move back to the bottom of the trading range at 80. A decisive break above 110 may indicate a move up to 140. A leading stock in the precious metals sector, Gold Corp. (GG), may be signaling that the direction of the trading range may be up.
Today’s Market Today Deutsche Bank declared the US homebuilders were positively cheap and upgraded them while the stock market had a rally follow-through day. That is a decisive percentage move on higher volume than that of the day before. While the Dow Jones US Homebuilder index ($DJUSHB) was up by 2.5%, a scan of the US homebuilders shows that the volume traded was below average for many of these stocks. Volume was only impressive in Lennar Homes (LEN), which was perhaps the homebuilder that was in the most technical peril before the analyst upgrade. Next week, I would like to examine the 2000 top in technology stocks and what the analysts were recommending as “buys.” As I recall, analysts were generous with upgrades into and through the Spring 2000 top, and while these upgrades were typically good for a quick pop to the upside, they couldn’t prevent the longer term trend which was down. It is likely that for homebuilders, it is April of 2000. Today’s action was not as favorable for the US consumer stocks in many cases. Although the retail holders index (RTH) was up over 1%, notable downs included PF Chang’s China Bistro, AmeriCredit (ACF), Best Buy (BBY), and J.C. Penney (JCP). Bonds were down, precious metals up, and oil was up. Anecdotally, near King of Prussia PA, I saw gasoline for $2.89 a gallon, and felt like filling the tank because it was so “cheap.” Even though oil was up, transportation stocks were also up almost by 2%. (And here is something you won’t hear on Bloomberg Radio: “I don’t know why!”) May be if gas is sustainable in the high $2’s, the US consumer will put in a good Christmas shopping season. I wouldn’t invest or speculate on this happening though. Leaving for vacation in late August, $2.65 gas seemed to be a problem to me. Now at $2.89, it’s cheap! The XAU and HUI were up over 2%, while gold was up about $3.00. Silver put in an impressive day, up 0.16 an ounce and is at $7.48. Say hello to Wave 3 of the precious metals bull market? Perhaps. I wouldn’t want to be sitting with a limit order to buy GLD at $45.70. Yea, it might hit that limit, but when you are in a bull market, you want to have your position, and you don’t want to get too “cute.” Oil was up and interest rates were also up. So generally speaking, the background was negative for stocks today. Yet they rallied on high volume. With a fundamental background which is as unfavorable for the US consumer, it is positively difficult to respect this rally – yet this is exactly what must be done. The short term desire of speculators and pressure on hedge funds to not miss a rally, trumps most reality and longer term fundamental data out there. That reality deserves respect along with the Houston Astros pitching staff. Have a great evening! Martin Goldberg
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