What Are Bonds Saying Again?

Every now and then I like to muse about the bond market. It's cut and dry about the action they see, the economy and markets teeter back and forth. Bond traders are the most paranoid of them all, frightened of price inflation which erodes bond values...quickly. Yields have come down sharply of late, and with every move there is a story, which can/does change in a moments notice. However, a longer trend tells a longer term tale, and we need to take heed to the message.

We're going in a different direction today. I will use fewer words and more pictures and demarcations to give us some clues about the markets and also some trading ideas. This is a great trading environment.

SPX vs Nasdaq

It's nearly the end of May, and the indices are up a little more than 1% for the month. What happened to sell in May and go away? Of course, there is still another week to settle the month, a crucial week if you interpret the charts. The monthly SPX shows a bear retest, and earlier this month the important 10 month MA was tested and rejected. This is natural after a steep decline that occurred over the last seven months, and I expect to see some flattening out and range pattern settling. After all, volatility is not indicating any wild swings into the future (the unknowns are STILL out there).

The Trend: One Way Directional Market

I'm not a big fan of calling bottoms or tops. Frankly, it's a guessing game, like touching an electric stove when you think it may not be on...but this game leaves most with burned hands. I prefer going for trends and higher probabilities. However, unless you think there is no value in equities (and yes, some actually DO believe this), then at some point of a market drop there will be a turn higher. So, perhaps a bottom is at hand (pun intended). There are some characteristics this time around that may prove different than previous bottom attempts.

The Metrics Say OVERBOUGHT

We've been hearing about the credit crisis for months now, and still things are frozen. Lord knows the Fed and Government have thrown everything possible at the problem to find a solution. However, credit is still hard to come by for even the best customers...and a home loan? Ha, that's probably the most difficult. Which brings us to the dilemma - the Feds want banks to offer more credit, make loans and start doing what banks 'do' to make money. However, the de-leveraging process, or paying off/writing off debt continues. So, what is it...the expansion of credit or new credit...or the unwinding of current credit? Having our cake and eating too, perhaps. I just can't see these two situations co-habitating in an uncertain world.

So, here we are at new market lows. Who couldn't predict that would happen, given the troubles of banks, the economy and government intervention. Past is often prologue with markets as we see the same results over again. Without some growth in the economy markets are limp. We also know that markets are forward-looking, and they must be telling us the future is somewhat cloudy. The government is throwing everything but the kitchen sink at the problem but it may not be enough (or just the wrong stuff).

Financials Are Insolvent... Period

• Take a look at EVERY mortgage in the US.
• Government offers to pay off the ENTIRE mortgage, but takes a 35% stake in the property, only to be paid back if the home is sold.
• Government offers to pay off HALF the mortgage, but takes a 25% stake in the property, only to be paid back if the home is sold.
• Government offers to pay off QUARTER of the mortgage, but takes a 15% stake in the property, only to be paid back if the home is sold.

• Takes bad/toxic mortgages off the market for good.
• Banks get paid back their principal balances without any recourse from taxpayers; they can loan out again.
• Foreclosures will stop or slow down significantly, and if the homeowner loses his/her job...won't get thrown out of their home.
• Puts a floor under housing prices.
• Income meant to pay mortgages can be used to spend in the economy, invest or save.

Bubble Trouble

There have been continued discussions about bubbles over the past 10 years...tech, housing, oil, gold and others. While we've seen these bubbles blow up, the collateral damage has been fierce. But there is one bubble that is currently being popped that makes us all cringe...the employment bubble. While it may not sound pretty, there is more pricking of the bubble on the way. You see, the employment bubble was created to support the other bubbles. There is always a lag effect. How much further to go on the layoffs? Quite a ways to go, I'm afraid. Until the excess capacity is reduced then layoffs will continue.

Is The 'Wall of Worry' Back?

One thing that bothers me about this market is the high level of complacency. I know the VIX is still elevated, relatively speaking. However, the level has come down about 50% since the peak in late November, and meanwhile the market has not broken out with that drop in volatility. Further, there is a pervasive attitude out there about the economy and its effects on business...'yes, we know it'll be bad...so what?' It's just that kind of complacent attitude that attracts buyers just before the market is ready to be whacked.

Happy New Year everyone! Was it just as simple as the turn of the calendar? Could it be the ugly bear is behind us, conveniently put into hibernation in the new year? I suppose some good feelings and a collective sigh are in order after the most horrific market performance in 75 years. What we have here though is a 'new' market of sorts, something that may look similar but is radically different. How so? Fewer participants, less risky players, a global community and weakness all around. Some new things are in store that we'll have to get used to.

What Happened to the Fear?

Well, I'd say it's about time. The Fed has finally put all its cards on the table for everyone to see. What they did on Tuesday was a gamechanger for all involved, but I have to wonder why it came so late in the game. After all, if you're losing by five touchdowns at the two minute warning, is that when you insert your quick strike offense from the playbook? It's quite obvious that the Fed is trying to get the game into overtime and has been changing the rules of the game to suit their needs by using more players and more footballs!

Bonds Are Incredibly Expensive, But How About Stocks?

There is a lot of talk these days about a bottom and we are certainly in the spirit with a seasonally strong period. I would argue that price action is looking a lot better, and charts are starting to build bases...from which we could see higher levels. Friday was a key 'hold' day at the 818 level for the SPX. This number was tested two other times last week and held stiff, so that is the line in the sand, with the VIX at the 66 or so level each time around. Sure the market has rallied 20% or so off the low, and perhaps some type of corrective action is in order. We'll be watching and looking for entry points. Some other things to think about are below.

Let's Not Forget - It's Still a BEAR Market

It's nearly Thanksgiving, which means the year is winding down.  This has been an historic year for the markets.  You can draw comparisons to the Great Depression, but haven't we progressed from those days?  Aren't we much smarter, experienced and sensible?  How can history constantly repeat itself without lessons learned? 

It seems to have been a long, drawn out bear market.  Some would say this started a year ago, others point to twenty months ago when the first shot on the bow was fired.  Whatever the case, the market has been decimated.  But is the cart before the horse?  I looked at some past bear markets and noticed one recurring pattern:  The markets overshot to the downside each time.  Perhaps this is happening now.

A Sign Banks Are Getting Less Risky

We've Been Here Before, Haven't We Learned Our Lesson?

What is this I'm hearing?  Aggressive rate cuts?  Oh sure, they are coming... no doubt about it.  The futures markets are pointing towards it, too. Ben Bernanke is on record saying 'the Fed will provide ample liquidity and do whatever it takes support the economy'.  Pretty much a slam dunk in my book. 

It's sad that bear market bottoms are not made from scare but rather despair.  In other words, when you're completely disgusted, fed up and throw your hands in... that is when the bottom is made.  I don't say this as I'm looking for a bottom or that we're near one, rather the mess we're in is turning emotions inside out.  One day it looks like the bandage will hold on the wound, the next day we need a triage unit to separate bodies.  For the average American, this sickening problem is coming to the fore, and with an election upcoming, a stand needs to be made.

Our Leadership Is Deplorable... and Once Again LATE

Some Things That Make You Go Hmmmm.....

I mentioned recently that I'm disappointed and really saddened at recent events.  The socializing of America is transforming our markets into a predictable situation where ill-gotten profits will be easily taken due to some regulatory body or legislation.  The end of free markets, the start of rigged markets.  There are some things that make you scratch your head and wonder...

On Bailouts, Backstops and Short Selling...Government Has Rigged This Market.

I am not happy today. I am proud to be an American, but it's a sad day for American Economics and Free Markets. Oh sure, there needed to be a solution to the housing crisis. Do we blame the government for this? There is LOTS of blame to go around, so it's not just them. Am I a doomsdayer? Not any more than Larry Kudlow is a pollyanna. I would call myself more of a realist than an optimist. Was the financial system a ticking time bomb? Perhaps. But something that couldn't have been healed with time? Not at all. The fact is this bailout of housing is a bailout of speculators...pure and simple. Deserving of a bailout? Not in the least...but in golf parlance, if the government gives you a mulligan when you make a bad shot....over and over again...how can you not at least shoot par? The fallout from the plan will have some collateral damage we have not even begun to consider. Question is, was the alternative a worse outcome?

Market bottoms.  That golden spot where we can all say... Oh yeah, I caught the exact low.  In a dynamic world such as the stock market, bottoms are elusive and random in terms of time and space.  How so?  Consider the confirmation of a bottom, which naturally occurs after it has been made.  Who knows when that'll be, right?  But like being on time for work, it's very rare to time it correctly.  When you leave home for your job, in most cases, you'll either be early or late.  This is true for market bottoms, so why bother searching for it?  Is it ego-driven?  Is there something really gained by finding the bottom?  I prefer another approach.

The Media Obsession