Monday, June 2, 2008

Revisiting the indicator review theme

Would you buy this chart?

Your opinion on this chart could very well determine your opinion on the market. The chart is the US Treasury ten year note yield.
  • If you think this breakout is sustainable and a long term one, then that's bad news for stocks . If this looks overbought on an intermediate term basis (and due for a correction), then that’s definitely a positive.

  • I personally think the ‘rising yields, rising inflation’ theme is a multi-year one. However, if things get rough for the remainder of the year, , the yields could very well go down and retest their March lows. (People could be underestimating the deflationary impact of declining home prices and any decline in monetary velocity)

  • The Fed has cut by more than 300 basis points over the past year. Yet, the change in the mortgage yields y-o-y is a paltry 40 basis points. The cuts are obviously not having their intended effect on the mortgage mess .

Here’s a look at the S&P500 chart:

  • The index briefly did a head fake by breaking out above the 200 day moving average, but quickly reversed direction and has now successfully tested the 50 day moving average, twice.

  • If we close below 1375 then of course all bullish bets are off.

  • The fact that this support has held, and looks to be forming a double bottom (notice the second retest is at a higher low), might imply a sideways-upwards pattern for the equity markets for the next 4-5 weeks.
I’ve also talked about the carry trade(dollar-Yen) as a proxy for investor risk appetites.
  • The carry trade is dead. Long live the carry-trade!

  • Yen is flirting with the 105 level, inspite of the 5% decline in the equity markets. Risk appetites and the ‘carry-trade’ is still very much alive.

  • The indicator review theme has consistently been the ‘reversion to the 200 day moving average’ one. Given that premise, we could very well see Yen close above 107 before the current upturn from March is in serious trouble.


Anonymous said...

Great post.. fascinating