When Will This Bear Market Rally End?

The yield on the 10-Year hits 3.75, as the US Treasury announces $75 Billion Quarterly Refunding.

The US Treasury announced that it will auction $37 billion 3-Year notes next Tuesday, $23 billion 10-Year notes on Wednesday and $15 billion 30-Year bonds on Thursday.

Yesterday Freddie Mac priced $4.5 billion 3-Year Reference Notes at 37.5 basis points above the 3-Year Treasury. This incremental cost is a tax on Americans, as Fannie and Freddie remain in Conservatorship.

Look at the daily chart for the yield on the 10-Year. Note the spike down in yield in March. That’s when the Federal Reserve announced that it would be buying Treasuries in a Quantitative Easing measure.

Courtesy of Thomson / Reuters

If you recall I predicted that Quantitative Easing would fail to lower yields and the rise in yields since that spike proves my point.

Fannie and Freddie may get a make-over

Abracadabra – The Obama team wants to strip Fannie Mae and Freddie Mac of hundreds of billions of toxic loans and create a new entity to house these assets. No matter how you slice it, the unwinding of Fannie and Freddie will be the biggest burden of all bailouts for US taxpayers. This graph shows the potential unlimited costs and the costs already taken.

The idea that the government can create two healthy mortgage companies with a clean slate is wishful thinking as more bad loans as sure to hit the GSEs right through 2011. I called for complete nationalization and hence liquidation of Fannie and Freddie since May 2008, and if we did that and helped homeowners first, the costs would be considerably less. Politics as usual!

We do not need a new Fannie and Freddie when Ginnie Mae can take over the overall need to provide new mortgages for all qualified Americans. Remember that beginning in 2010 Fannie and Freddie portfolios must be reduced by 10% per year eventually down to $250 billion each.

Is it speculation or the weak dollar keeping crude oil prices elevated?

The daily chart for the euro reflects the weak dollar, which does impact higher crude oil prices, but we are approaching monthly resistance at 1.4543.

Courtesy of Thomson / Reuters

I say that speculation is the bigger factor with crude oil above my annual pivots at $68.81 and $66.51. Semiannual resistance is $95.78.

The price of a gallon of gasoline is a tax on US consumers, and this is reflected in both recent weaker confidence reports and decline in consumption.

Courtesy of Thomson / Reuters

Let’s raise margin requirements to 50% and watch crude oil decline to levels that can help consumers drive us out of “The Great Credit Crunch”.

The daily chart for the S&P 500 is extremely overbought with a MOJO reading of 9.4.

The daily chart for the S&P 500 remains extremely overbought after testing the Election Day close of 1005.75, up 50.8% from the March 6^th low. My annual pivot is 967.1 with a daily pivot at 1004 and the October 2008 high at 1044. The final Bear Market down trend is at 1167.8 at the end of August.

Courtesy of Thomson / Reuters

My new projection is for stocks to top out by August 12 then decline 20%.

Disclosure: No Positions in stocks that I cover.

Comments

[j-dub]

The better question would be as to how to trade this market.
You want to make any money here?

Ok, first call the most savvy, intelligent, and logical individual you know.
Get him/her to quit his/her day job and work with you as a full time day trader.
Every morning, have him/her stand on their head, hold their nose and push the buy button!!!!

2009 Aug 06 10:50 AM

[Mad Hedge Fund Trader]

Not soon enough. There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 130 point move, and the Dow on top of a 1,200 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880’s, I have been holding back, holding back, holding back. See my warning not to sell too soon . I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don’t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a “W” shaped recession and another market dive in 2010. How finely do you want to trade this thing? It’s clear the big core shorts at the major hedge funds haven’t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA’s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a “Sell in May and go Away” to be followed by another October crash? If your friends’ long positions make money from here, just revel in their good fortune, and let them pick up the dinner check.

2009 Aug 06 10:55 AM

[JuniorEnergyFund]

MadHedgeFundTrader,

Evidentially Mr. Market has a friend named Goldman Sachs. Did you see the front page of today’s Financial Times?

Goldman’s $100m-a-day bonanza underlines bank’s trading strength

Q2:
$100m on 46 days in a row. Only 2 losing days for the quarter.

2009 Aug 06 11:06 AM

[whidbey]

Good comment as usual. I think your August top is too early and the drop too shallow, but we agree something must give on the rally, and soon too.

The bond mess gets worse because no one wants to clean it up, political will to do anything is just not there.

So where does it all end this year; in a funk in which bonds keep rising due to demand for more debt, and the housing market is hurt rather badly, and the economy starts to tip over again. Then stimulus two arrives, two cars in every garage and a chicken in every microwave (hopefully a new one). An so 2010 the year of our disappointment turns out to be not much better than 2009.

2009 Aug 06 01:51 PM