Boys that is one CURIOUS looking board today. Dow up 60, Naz in the red and the rest of the indices weak. I've got my theory....

The only chart I study extensively is located at this URL:
http://valueline.com/pdf/valueline_2006.pdf

The chart is the Long Term Perspective Dow Jones Industrial Average DJIA) (1920_2005) and is freely available at www.valueline.com, so I don't think there are any copyright issues.

The DJIA is the basis for practically all current stock market indices (Standard & Poor's, Russell, Wilshire, name one and its origin probably began using this index average as the catalyst)

A cursory glance at the chart immediately reveal that generally, the American economy has historically trend upwards with one or two major a and several minor reversals along the way.

A more detailed study reveals some interesting conclusions:

1. The greatest, most sustainable economic advance occurred after World War II (1949) up to the beginning of the Vietnam War (1964). In between, dip occurred in the late 50s as a result of Sputnik (Cold War) and the Cuban Missile Crisis (early 60s). Get my drift: there is no such thing as a positive war time economy.

2. The Reagan presidency didn't have that great an impact on the economy;(notice the reversals during his administration that nearly wiped out all the gains.) however, the military industrial complex that President Dwight Eisenhower warned us about finally came to prominence.

3. The greatest gain in the DJIA occurred during the Clinton administration, the President we all love to bash.

4. The flattening of the average during the current administration.

As an old New Dealer, my primary concern is with the unrelenting advance of the DJIA without a significant reversal during the last two decades. HOWEVER, thanks to the absurd economic, foreign, domestic policies of the current administration we may be in for a soft landing IF the DJIA remains flat indicating the economy is painfully attempting to absorb the excessive consumption and borrowing of this current generation.

Critics of the DJIA claim it is not a true representation of the American economic condition because of its low sampling rate (30 stocks) and price weighting. I'm not qualified to agree or disagree, but I fully supports Bill Cara's view that this is the Index the Little People should cut their teeth on (the KISS principle) before moving to more complex indicators. Besides, if you study the other market indices you will conclude that they all track the DJIA maybe a bit smoother but close nevertheless.

There will be those who surely draw different conclusions than mine after conduction their own study of the DJIA, but this fact is what make the study of technical analysis so fascinating - if we all drew the same conclusions, we would all be rich beyond the avarice and the “sell side� would have declared war or announced a truce by now.

What would this do to the bond market? And which direction would this movement drive TLT for example?

Education questions:
How would raising rates effect the bond market? And TLT for example?

How would pumping effect the bond market? And TLT for example? What indicies can be used to 'measure' the 'pumping' by the feds?

Bill-
If the ECB holds the line on their interests rates, that means that the Federal Reserve has one less factor to worry about when considering its own rate measures. The Fed's mission is to maintain a stable currency: one aspect of that mission is to make sure that our lending rates are more attractive than compteting rates in order to finance our deficits. With various rates in the 5%-6% range, we are offering a more attractive rate than either the euro or the yen, to our potential lenders. If the ECB does not raise rates due to the softness of their economy, we will not have a need to match our spread with them. We, of course, may need to raise rates for a myriad of other reasons, but at least this is not one of them.

If we don't raise rates, there is a better chance that the USD index will fall. Therefore, money investors will want to dump their cash into a more attractive asset, i.e. gold and commodities.

Bottom line here is that if the Fed raises or indicates that they will keep raising, gold will fall. If the Fed relaxes, gold will rise. This assumes that all other factors (U.S. economy, money supply growth, etc.) affecting gold prices are the same.

Quentusrex,

The Federal Funds rate has the biggest effect on notes and bonds with the shortest durations. It also has a near linear effect on the bank prime lending rate. It has a much less affect on the longer (5 year and up) lending rates, which are pretty much determined by market forces. Nonetheless, there is upward pressure on all rates. Regardless of what the Fed does, a sinking economy will invert the longer rates, at least for a short period of time, as investors are competing to lock in a rate of return that is better than what they think they can get by purchasing equities.

"Pumping" is when the Fed increases the money supply through informal intervention in various markets. The Fed has the authority to intervene in markets in order to maintain currency stability. Lately, it appears that they are intervening quite often to either prop up stock prices, or to fiddle with bond yields. Bill has mentioned the name Dino Kos many times, who runs the trading desk of the New York Federal Reserve, which is the point where all the pumping allegedly takes place.

Pumping can be done either through open market operations or with repurchase agreements. These numbers are published weekly on the various Fed web sites, and are tracked by a number of blogging sites.

To answer your specific question #2, if the Fed engages in the purchase of bonds (i.e., pumping) on the open market, bond prices will rise, yields will fall, and banks will be flush with cash to hopefully be used to induce a short covering rally. The opposite will hold true if the Fed sells bonds, which then removes liquidity from the system.

Apologies for the long-windeded explanation, but I hope this helps.

It helped me, smess. Thanks.

-smess

I thought I posted this earlier, but I didn't see it show up. Thanks for the response. Long winded is much better than too short. Thanks.

On another note. How does the stock TLT work? I know it has to do with the 30 year treasury bill, but what is the price of TLT linked to? I looked back at the price and compared it to historic Fed rates and didn't find too much similarity. Is it somehow linked to a different rate, or is it linked to something other than 30-year Fed bond rates?