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Today's Market WrapUp 08.16.2007 Mon Tue Wed Thu Fri Goldberg Archive Conclusion:
Long Term Interest Rates are Heading Higher
The recent market selloff was accompanied by a flight to the safety of Treasuries. Stocks down, bonds up – recently we’ve seen this seemingly day after day. However, it is important to note that in spite of this short term action, the long term trend in long interest rates has changed from down to up. Even though rallies in the bond market (interest rates lower) have been sharp and convincing, the long view supports the conclusion that long term interest rates are heading higher. One technical chart supporting this conclusion is illustrated below. Upward trending interest rates that occurred in the 1960’s finally topped in 1982. High rates of inflation accompanied the rising long term trend in interest rates. The secular bull market in stocks began in 1982, and this generally corresponded to the start of a long interest rate downtrend. Stocks bottomed when interest rates topped. From 1982 until recently, there was an active downtrend in long term interest rates; however, the trend of lower interest rates is likely over, and long term interest rates are likely in a young secular uptrend.
Below is a weekly chart of the 10-year Treasury note yield from 1990 to the present. The bottoming of interest rates in mid-2003 was followed by a series of higher highs and higher lows shown on the right hand side of the chart. In spite of the current bond market rally caused by an apparent flight to safety, this was only sufficient to produce a settling back of interest rates to the 2-year (104 week) moving average (thus far). This “flight to safety” appears only as an insignificant tick in the far right side of the long term chart.
Similarly, the 30-year Treasury note yield is illustrated below. The top annotated line simply connects the important interest rate highs, and the bottom line connects the important lows. It is apparent that the highs have leveled out, and the lows are now trending higher. Conclusion: The long term trend of long interest rates is higher. What would invalidate this conclusion? A decisive break of the trend of higher lows in the 10-year note yield (above chart), or a decisive break of the trendline defined as higher lows beginning in mid 2005 (below chart).
Today’s Market Today has all the appearances of a reversal day as the major indices finished near the flat line. Volume was heavy, and the Nasdaq 100 put out a doji candlestick. It closed trading within a point of the 200-day moving average.
Here’s the candlestick chart of the S&P Small Caps, showing a bullish hammer.
Here’s the transportation index – a bullish hammer.
Here’s the emerging market ETF. This is the most bullish hammer of all.
Here’s the Dow Industrials – bullish hammer again.
What is a hammer? It is when a market or stock opens and closes in a narrow range, after a downtrend. There is a “tail” representing trading much throughout a lower range during the day. The longer the “tail,” the wider (and lower) the range of trading throughout the day. Higher volume (as shown in the Dow Jones Industrials), tends to confirm the bullish nature of a hammer. The bullish nature of the hammer such as the ones in the Dow and emerging market ETF would need to be confirmed. In the case of the Dow, confirmation would be a couple of ticks above the 200-day moving average. This is what the technical chart is suggesting to me. What is going on behind the scenes? Consider this possibility. Over the weekend, the public was given a large dose of “the fed is adding liquidity” talk. I even got a call from my cousin (a medical professional) who mentioned this to me. So through the beginning of the week, with the public expecting the market to be saved by this “added liquidity,” the market continued to sell off. This was the perfect set up for both panic selling and aggressive (but late) traders jumping on the bear side of things. Maybe the liquidity was waiting for this to occur before finally finding its way into the financial markets (this afternoon). Now with sufficient buying power via new liquidity, panic sellers becoming panic buyers, and short covering, the market becomes free heading higher. Of course this is just a theory, but the daily hammers deserve respect from a short term trading perspective. Here is a brief look at the $HUI. The corrective pattern still deserves the benefit of the doubt for now. It is a little discouraging that the recent lows have been decisively violated today. The October of 2006 low has not yet been violated, and unless 270 is decisively violated, it is still a bull (but difficult) market.
Here’s the monthly picture for Gold. As you can see, the long term picture merely shows a long consolidation pattern.
Nothing has changed with regard to the long term analysis of the bond market. A stock market rally would remove the flight to safety and as a result, interest rates would head higher as has been the trend since mid 2003. Finally, last week, I posted the chart of Berkshire Hathaway in a hurry. Here’s a closer, but later look at the price and weekly volume action. As you can see, this stock was under accumulation since it began its consolidation of its gains in December of 2006. Tomorrow, it is likely to break out of a long consolidation pattern on high weekly volume, provided that the general market holds up.
Have a great evening. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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