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The chart below dates from 1960 to the present, and shows the 10-year Treasury note yield. There are two key trendlines that dominate the entire 46-3/4 year chart. The first is the linear uptrend in long interest rates from 1960 to about 1982. In 1982, the long term interest rate went into a bear market that has lasted until recent years. In mid-2006 the long term trendline on the 10-year note was tickled, and then it whipsawed bond bears. Before moving on, please examine the right edge of the long-term chart beginning in mid-2003 (3-1/2 ticks from the right edge). Does it appear to you that the 10-year note interest rate is heading down, or up?
The chart below of the 30-year yield depicts a shorter term view - from the mid-1970s to the present. As with the 10-year note, the bear market in interest rates is regular and linear. Unlike the 10-year note rates, the uptrend in the 30-year interest rate trend is not as obvious (although it can be seen). During the period when the down trend in interest rates was clear and linear, the 3 rallies were sharp and of relatively short duration as noted in the chart.
This can be observed more clearly in the weekly chart below that dates back from 1990 to the present. It shows 2 of the 3 sharp corrections annotated in the longer chart above. The last 2 rallies between lower and upper channel lines (shown in red), were of about 1.25 years duration. However, since bottoming in 2003, the rally to the upper channel line has lasted over 2-3/4 years, more that double the duration of the previous channel trips. I suspect that the downtrend in long term interest rates ended in 2003, and since that time, rallies in interest rates have become longer in duration. Yet this supposition will not be confirmed until the long term (down) trendline is broken decisively.
Provided that the early-2006 low in interest rates at about 4.5% is not violated, one could argue that the 30-year interest rate has been heading up since mid-2003, a duration of more than 3-years. (Conversely, one can also argue that it took longer for the rally in interest rates to travel the same distance, and therefore rates are still in a downtrend.) A look at the 4-year weekly chart of the 30-year bond yield shows a rather mixed picture for the intermediate term…trendless at best. With only this “window” one cannot tell whether the secular trend of interest rates is now down, up, or neutral. Momentum is only momentum, but the weekly slow stochastic indicator seems to suggest an oversold condition that is in the process of correcting and perhaps signaling higher interest rates in the next few weeks.
While the intermediate term trend for long term interest rates is murky, the short term action suggests higher interest rates ahead. The 6-month daily chart below of the 20+ year Treasury bond ETF shows that the summer rally in bonds accelerated to a probably unsustainable rate in late September, before decisively breaking all suspected (up) trendlines. (Bond price and interest rates move inversely to each other.) This occurred at a time when seemingly everyone had a rationale on why interest rates were heading lower. It appears that there is little in the way of nearby technical support near be for the long bond ETF.
Today’s
Market – No Legitimate Reasons to Sell The stock market rallied broadly with speculative and highly shorted sectors leading the way. Homebuilders reached levels not seen since June and this action is sending a signal to traders that you aren’t going to short stocks based on fundamentals. There’s similar action with stocks such as Eastman Kodak and General Motors. With the indices rallying with barely a day of minor pullback, it is clear to traders that if you are long, there is no reason to sell. From a technical perspective, practically all trading systems are based upon waiting for a trend to reverse before selling or moving to the other side of the trade. So in short, there is simply no technical reason to sell either. Folks recently received their 401 K statements, which were by and large, highly bullish for the summer quarter. This is more reason for the public to chase the rally, but it is certainly not a reason to sell. Earnings season is upon us, and this brings corporate America to the mike to put their respective company’s best foot forward (while they claim special items and one time events). Outlooks are likely to be rosy again although, this time the disclaimers may actually come into play in a few months. Again, this is another reason to buy stocks; but not a reason to sell. If this isn’t enough, it seems that every day there is another Fed governor giving a speech covered by the news services discussing how great the economy is doing, and how it is are due for a soft landing. Again - no reason to sell. This is the stuff of a rally that is feeding upon itself, and will probably only exhaust itself when there is no one left to buy. In this suddenly bullish environment, the chance of a parabolic up move must be considered by owners of stocks and again, there is no reason to sell because you might miss such a bullish parabola (remember the 2000 Nasdaq?). Oh, and how about market sentiment? It seems that rightly or wrongly, money managers and the public are convinced that the market sentiment is broadly bearish, and therefore, by their ownership of stocks, they are “contrarians”. It doesn’t take much to convince readers of Barron’s that they are contrarians either, because in “The Trader” section there is a chart on market sentiment indicating that we have been in “panic” mode since the spring. Yet, at the risk of losing the esteemed label of “contrarian”, I’m even skeptical of most market sentiment indicators. The linked web site of Robert J. Shiller, author of Irrational Exuberance, contains less publicized market sentiment data that seems to suggest that institutional and individual investors are far from “panic” mode. So in short, I think that practically everyone thinks they are a contrarian except the actual contrarians. With all the excitement in the stock market, it is relevant that gold, silver, and mining stocks seemed to have gained a measure of footing and are likely to have survived at key technical support areas without breaking down. In addition, while not decisive, oil may have put in a similar bottom 7 trading days ago. On that day, the HUI tested a previous bottom without breaking below it. Oil, as measured by the ETF, put out a bullish hammer pattern on relatively high volume that day. The bottom of the tail was tested today as oil rallied a few pennies above the bottom of the tail. It’s still early, but this is one to at least watch. A close below 52 on the ETF makes this bullish analysis for oil no longer relevant.
Here’s the similar time frame showing the gold miner’s ETF. Note the apparent successful test of the June bottom with the high volume hammer candlestick pattern. Traders entering at today’s close of 34.7 would have to risk down to about 31.5 to take a long position.
Backing up to a long term timeframe, the chart below shows an updated rerun of the HUI in Elliott Wave terms based on this analyst’s proposed wave count. Note the apparent successful tests at about 275 during the approximately 6 month corrective phase defined as dark blue wave 2 of Wave III.
Have a great evening! Martin Goldberg
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