Weekend October 6 2012
The US jobs report sparked a sell off in T Bonds wrapping a bruising week for the haven market.
Looming supply also weighted down prices, with $66 B set at auction next week.
Treasurys Sell off on Strong Jobs Data Page B4, Weekend WSJ
Oil Drops 2% on Demand Concerns
And on page B9
The average high yield bond now yields 6.46% just .26 percentage points above the record low of 6.2% reached Sept 14.Investors have put an estimated $8.58 B into high yield bond funds in September..to a record $64.5 B for the year
Time to Trash Junk Bonds
We laid out the scenario for T bonds peaking and then falling this week in our update last weekend. This would have happened no matter what the jobs report was, but that's the media always linking the news of an event. But a three point drop in two days linked with $66 B of supply next week does have some merit in keeping a lid on prices.
The market have slowed a bit what with options expiration, then the end of the quarter, then the debate, and then the jobs report on Friday, the markets do pause for news events no matter what the news is. But our overall scenario of the public exiting bonds is intact. They have so far been reluctant to really embrace stocks though. Junk bonds are a proxy for high dividend stocks and that is where investors are, typically piling in at the highest junk price and lowest yield.
Let's update our chart on TLT from last week.
TLT Long Maturity Bonds
This is an update of the chart we showed last weeekend. We predicted that TLT had peaked again and was about to drop. Here are the salient points to grasp from the above picture.
- it takes about two weeks from low to high or high to low to move up and donw this channel
- RSI made its third consecutive lower high this week.
- The first two moves resulted in lower low on the price chart. It is reasonable to expect this move to peg even lower in rpice, taking ou all the moving averages.
- Taking out the 200 day MA will no doubt trigger fund selling in their quant driven programs.
- The Sept Low was three points lower than the August low, if that pattern repeats, hitting the lower channel trend line, 115 seems a reasonable target for this move.As TLT continues to fall the logical expectation is further downside on each move as it becomes more clear what is happening.
The Government Bond Market is closed Monday for Columbus Day (who knew, Columbus was a government bond trader?). Presumably stocks will trade but don't expect much out of TLT as a result on Monday.
Now demonstrating how the financial sand continues to move in the hourglass from risk off above to risk on here is the inverse of the TLT chart, GDXJ.
While the RSI for TLT makes progressively lower highs, the RSI for GDXJ makes higher highs, a bull market. And note that TLT has moved up in stair step fashion, see the black stairs in the chart?
The 50 blue and 87 purple shortest MAs are really starting to take off. Perhaps the pullback on Friday was the last test of buying power before a lift off. On the other hand, the gold chart itself looks toppy.
The weekly chart looks very toppy, the daily even more so. The huge reversal back in February looks ominous. Gold was up for the week but down $12 Friday.
Jeff Kern concludes that the very short term on gold is 'not callable.' I agree. His assessment is that gold is in a longer term bull market subject to violent short term swings as it always has been.
US Dollar Weekly
In fact the price action above the MAs looks a good deal like SPXA150R two charts below. The Euro moved up, pulled back to test the MAs, and then closed this week higher. And it has stayed above the MAs for the longest period since the decline began a year ago.
And the conclusion is? First a look back is in order.
I returned to this business in 1984. Then bond yields were 13%, and absolutely no one wanted any part of them. Really.
30 Year Bond Yield
I suggested buying that summer as yields dropped. Bond prices move opposite bond yields. Looking at the chart today that looks like an easy call. I was reading Ian McAvity's letter, Deliberations, at the time, he was still bearish bonds and stocks but as I observed to one client, well turn the yield graph upside down and what do you see? The answer was the bottom of the bond market in price. Today all the public wants to own these same bonds as they yield 2.9%. Perhaps this explains my fascination with the power of social mood, it is truly amazing to have lived through the decline in rates for thirty years. Now the herding instinct has the crowd totally opposite their 1984 thinking. That thinking in 1984 of course was the result of two decades of inflation, two oil embargoes, the successive failed Presidencies of LBJ, Nixon, Ford, and Carter. A realtor remarked that she doubted we would ever see single digit mortgages again in our lifetimes. That kind of thinking is evident at market bottoms and tops.
Natural Gas versus Crude Oil, a Tale of Two Very Different Markets
We were calling for a low in natural gas, and tried a couple of energy trusts to our regret based on that idea. The energy trusts were a disaster and we exited with small losses, but the idea was right. Natural gas bottomed and has risen 60% since. Now the US plans to become a natural gas exporter. Meanwhile the price of crude oil via the solid black line has fallen. US production has expanded, we drive less in more fuel efficient cars and trucks, and the real demand is from emerging markets. It could be that we come to care less and less about what happens in the volatile middle east as a result.
Since the low in June FCG has been the far better way to be on a natural gas rally.
Bullish Percent Indicator 150 Day MA
Here is our comment from the update last weekend on this indicator.
This is a pretty good picture to just where the overall market lies. This indicator finally pushed through all the MAs, pulled back in a test and now looks set for a final run up. It does not make us want to own lots and lots of stock again but as out title suggests, the Final Run Up Lies Ahead.
And that is just what happened. SPXA150R (now that's a mouthful) stayed above the MAs, they hae converged, now the indicator is embarked on what is probably a final run to the top. The indicator is about 15 points from its previous high.
High Low Weekly
I exited positions Sept 18 near the peak of this indicator. I will explicitly lay out my strategy and positions a bit later for how to profit on the last and usually parabolic portion of the move while attempting to minimize risk.
I would rate a decline in TLT as the highest short term probability based on the collapse this past week and retreat from 125.
Next the Euro looks in rally mode but the Dollar may be nearing some sort of low. The Dollar is nearing its uptrend line but could drop further.
The bullish percent indicator looks good for stocks which should be good for gold. The weekly high low indicator has turned up which is also bullish.
Gold is likely to benefit from these actions. But it is up against some resistance here.
I sold the vast majority of my long commodity positions September 18. Those stocks fell and have now rallied back a bit but not to the Sept 18 levels. I am long puts on TLT and calls on GDXJ. I feel more confident about the puts than the calls for the very immediate term. This strategy was initiated to bank good profits, offer some considerable upside, but limited risk to the downside in terms of risk of capital. Most of these expire in two weeks. A bump in my favor in either puts or calls will likely have me taking profits.
And that is probably about as a good an investment letter as you will read this weekend, really.
Speaking of Contrary Thinking - The Presidential Race
The University of Iowa has an on line site that allows one to bet on various political races. Prior to the debate on Wed Night, Romney had sunk to a one to five out of favor with Obama. The lines are still far apart but it does look like Mitt has bounced from a very out of favor condition. Romney looks Presidential as Peggy Noon observed in her column this week. She went on to compare Obama to a balloon with the air leaking out. It appears that a handful of states including Ohio, Virginia, PA, will decide the race. But now it is a race.
Thanks for reading The Market Perspective
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