THE WORLD EQUITY MARKETS ARE RELATIVELY ‘CALM’ THIS MORNING:
The Asian markets closed ‘mixed’; Japan was lower – S. Korea and Hong Kong traded higher by very modest amounts. In Europe – trading is rather subdued with very little movement around the ‘unchanged’ level. This condition may very well persist throughout the week given there is very little in the way of ‘economic reports’ todrive prices either higher or lower. The US dollar is lower this morning as it is simply giving back that which it took late last week; and not terribly surprising given its recent strength. Too, crude oil prices are rising again on refinery issues and likely to continue doing so for far longer than anyone anticipates. We are long oil stocks…and intend on remaining with this core holding for quite some period of time.
But that said – Fed Chairman Greenspan is on The Hill to give what us old timers refer to as his semiannual Humphrey- Hawkins testimony; this used to be a requirement for the Fed Chairman twice a year. Now, it is simply a courtesy the Fed provides Congress in the name of transparency and accountability. In any case…his testimony it will prove important indeed given the markets will be starved for any information and his thoughts in particular given this is supposedly the ‘last inning’ of their tightening cycle…provided it doesn’t go into extra innings that is.
FRIDAY’S BOND MARKET REVERSAL ‘RANG THE COLLECTIVE BELL’ IN OUR OPINION:
Rarely do markets ring bells at major highs or lows; but there are times when reversal patterns do just that and we must respect their powerful nature and act upon them with impunity. If they give us a ‘gift’…this would certainly qualify as one as the 10-year note yields broke through major support and then reversed higher to close at 3.98%. Chairman Greenspan’s famous ‘conundrum’ remarks occurred with the 10-year trading at 4.10% – he is likely to ‘clarify’ and gear his remarks towards higher rates. The FOMC is worried about ‘local housing bubbles’ and the Chairman will use his bully pulpit to push rates higher on the long end to stymie further gains that will be precipitated by a falling 10-year note yield.
As a result, the most obvious way to profit from this is to sell either the 10-year note or 30-year bond futures short; short the Lehman 20+ year bond fund (TLT)…or short the housing stocks such as Centex (CTX) or Meritage (MTH). In our personal accounts…we are doing each of the above…but those unable to borrow TLT shares from their broker may look to short the housing stocks given their ‘tight correlation’ with interest rate movements.
AS NOTED PREVIOUSLY…ECONOMIC REPORTS ARE ‘SCANT’ THIS WEEK:
The only one of real concern to the markets will be Thursday’s weekly jobless claims and Friday’s April Trade Balance. Outside of this…the markets will trade as they will without economic impetus. Next week the calendar picks up quite a bit; so this is a week determined by Chairman Greenspan.
Good luck and good trading,
Richard Rhodes
GENERAL TECHNICAL COMMENTS:
The short-term technical outlook is becoming more ‘bearish’ as the averages are all sitting at extreme overbought levels in terms of price and time. Friday’s decline likely set the stage for a correction of some magnitude in the days/weeks ahead. Adjust your trading strategy accordingly. A such, we are embarking upon a ‘top picking expedition’ to take advantage of this correction; we have added one short position in SPY, will add another in IWM today...and would consider QQQQ. The only reason aren’t putting on QQQQ is the relative sponsorship it has found lately; but those aggressive traders can certainly consider doing so. We must act like ‘guerrilla warriors’ in our emerging short campaign as the intermediate-term is still technically positive. Remember, strong markets stay overbought for far longer than we can stay solvent; this is our risk at this juncture.
In more specific technical terms, the S&P 500 breakout above major ‘pivot point’ resistance at 1180 is ‘technically bullish’; which targets the highs at 1200-1220...and perhaps higher. But Friday’s reversal from major resistance above 1200, and
given the ‘stretched’ nature of the indicators and selectiveness of the rally...we would expect a minimum correction back towards 1180...this is the point where we will ‘reassess’ the validity of our short positions.
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