|
Today's Market WrapUp 03.08.2007 Mon Tue Wed Thu Fri Goldberg Archive Keep
a Jaundiced Eye on the Bond Market
Over the last few days the stock market has tried to regain its footing as the public seemingly has breathed a sigh of relief that the worst is over. Last Tuesday, the market went from a footnote on most daily news reports to the lead and front page story at the blink of an eye. Now with the market retreating back into the business section of the newspaper and volatility back from its recent spike highs, it would pay to keep a jaundiced eye on the bond market. So much of the bullish case is derived from the presence of persistently low interest rates, and the recent media buzz has been about the rally in the bond market. Yet in the longer term, although it may not seem so, interest rates have been heading upward. The direction of interest rates is an important factor in the direction of the stock market since up trending interest rates tends to support lower stock prices and visa versa. Technical analysis suggests that this is a crucial time for the bond market as the interest rates are now making a higher low. If the higher low holds, that would strongly support a continuation of the intermediate term trend toward higher interest. Similarly, failure of the higher low to hold would support a change in intermediate interest rate trend from higher to lower. The chart below is a long term chart of the 30-Year T-Bond yield. As is apparent from the long term perspective, interest rates have been heading downward in a secular trend that has started in the early 1980’s (not shown). The red lines define a consistent linear channel since before 1994 to the present. Lower highs have been made in 1994, 2000, and 2006, along with lower lows made in 1993, 1998, and 2003. However in the shorter term, interest rates are spending more time closer to the upper trendline. Additionally, as shown by the horizontal blue dashed lines, since mid-2003 the 30-year bond yield has made a series of intermediate term higher lows suggesting a possible change in secular (long term) trend. Finally, there has been a change in the bond market’s character since the possible bottom in long interest rates in mid-2003. Whereas previously, interest rates have risen in short duration large magnitude sharp rallies, recent years have shown interest rates rising in shorter steps.
A closer look at the 30-year bond yield is appropriate. The chart below runs from 2001 to the present. The 30-year bond yield made its low in the summer of 2003. It made a slightly higher low in the late spring of 2005 and since then there has been a series of higher lows and higher highs. Since the high in mid-2006, long interest rates have fallen in a sharp manner, where a higher low was made in late 2007. A rally to just over 5% (50 in the chart) occurred early this year making a lower high (shown in red) and then a similarly sharp drop occurred in recent months until the present.
Below is an even closer look at the interest rate on the long bond. With the rate making a lower high (shown in red), the importance of holding the interest rate and series of higher lows would seem to be important in establishing the long term trend.
The 6-month daily chart of the 30-year T-Bill rate is shown below. It is clear that the chart pattern is now at a critical point in time. There is no short term support beyond the most recent price action at about 46.25. A break of 46.25 to the downside would likely result in a challenge to the interest rate low made in early January of this year, and this would support the longest term trend (first chart) toward the secular trend in lower interest rates. However if this short term support holds (as shown by the thin blue horizontal line), the longer term trend of increased interest rates would still be in place.
It would be folly to underrate the importance of the current technical position of the long bond. My personal opinion is that the banking industry will trot out Alan Greenspan on a daily basis if it will support lower interest rates in spite of a grim fundamental picture. If interest rates head higher as they eventually must, then the collapse of the sub prime lenders and last week’s tremor in the stock market will be just the beginning of something really big and bad. For those with strong bearish opinions about the bond market there is a low risk trade for consideration in the long bond ETF (20+ year Treasury bond fund). This ETF moves inversely to long interest rates, and in the same direction of long bond price. After having made a fearful high in last Tuesday’s swoon, it has failed to hold these highs which also correspond to the December 2006 highs. Today’s close at 90.35 would seem to present a selling opportunity of bonds if they open lower (and interest rates higher). A close above Tuesday’s tail suggests that a small loss should be taken and this would correspond with a break of the interest rate support of 46.25 shown in the chart above.
Today’s Market A stock market rally in consistently lower trading volume supports the theory that last week’s climaxing volume change in trend was the beginning of a market correction lasting months and correcting significantly more than has occurred so far. This is clearly shown in the chart below where the diminishing volume is indicted by the red line. The staying power of the rally is highly questionable on this basis.
Of similar importance to the market is how fan favorite Google is acting – a topping pattern in the weekly time frame as shown.
While one cannot rule out a continuation of the most recent rally in the stock market, it would not be wise to think that the worst is over. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
INFORMATION |
