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September 5, 2006

A word about Zero's, Tues., Sept. 5, 2006, 1:17 PM

This weekend I did at least two things right. First I opined that bonds were way over-bought, and secondly I wrote that my #1 favourite market strategist (Don Coxe) had it wrong when he advised traders to buy zero coupon bonds. I said not yet!

Bonds: Bonds rallied yet again but are now over-bought as I see it. Don Coxe loves Zero Coupon Bonds now, but it's a bit too early. The U.S 10-year Treasury bond is now yielding 4.726, but is screaming to go back to 4.95 or so. Inflation has not disappeared;

From the charts above, particularly the longer-term Monthly moving average trend lines, and the high cyclical values of the Weekly RSI data, it seems to me that possibly the bond market will soon start to test the resolve of the bond traders who have swung their capital into the "inflation is dead" camp.

When I look at the 10-year T-Note yield index Weekly RSI-7 (25.7), and the Daily (12.6), I'm thinking that bonds are well into over-bought territory. This is just the first up-wave in the new Bull market for bonds. As I always say, let's look at the whole cycle " the up and the down " before drawing a conclusion that buying bonds is a safe and prudent investment.


The chart below will show you what happens when you buy bonds at the top of the cycle. Bonds are not any different from stocks: they both represent prices. You can't buy a bond when the yield is running an RSI of ~10.

And if you bought Zero's last week, your portfolio got hammered. You needed to wait until the yield reached an RSI value of 70 or so.

Chart will not upload. I'll insert it later. The point is that today, the bond market took a hit as yields are up +6 basis points.

Posted by Posted by Bill Cara on September 5, 2006 01:17:25 PM | Category: Bonds

Discourse

Is this what that break in the CRB is suggesting?

Commodities: Is The Supply Response Finally Coming?

http://www.bcaresearch.com/public/index.asp

And what happens IF that yield curve inversion plays out into a recession? Gold should break from the pack, but I would think caution is warranted broadly in the commodity complex and in emerging markets.

Posted by: stockman [TypeKey Profile Page] at September 5, 2006 1:46 PM [link]

Jock,

Thanks for the info on TC2005 and the RSI scans that you set up. Would you mind sharing your RSI personal criteria formula with the rest of us?

I used to subscribe to TC2000 and am thinking about doing it again.

Toby

Posted by: bdtobias [TypeKey Profile Page] at September 5, 2006 1:58 PM [link]

Don Coxe has disappeared behind a firewall (or iron curtain, depending on your perspective.)

Posted by: Fred [TypeKey Profile Page] at September 5, 2006 2:46 PM [link]

Speaking of Yield, one of the things I follow (since I am more of a short term trader) is the 2 Year Note - I find this can be a good proxy for taking growth (tech) oriented trades.

It broke its downtrend recently - tech responded with its "surprising" rally.

It will be interesting to see what happens if the economy slows and the 2- year note yield keeps falling. Initially the market will rally
(as it did in 2000) and as it is now.

Will we reach a point where however the falling yield will not cause stocks to rally (as in 2001/2002?)

Interestingly Dr Boom Gloom Doom (do I have the order right) thinks the Fed will very soon begin flooding the market with liquidity - but after initial positive results - assets will stop responding and will start to decline - and he feels there will be nothing the Fed will be able to do about this.

In other words - the "interest rate tool" is broken.

So he is advising gold - as it will keep its value.

tradesman

Posted by: Tradesman [TypeKey Profile Page] at September 5, 2006 2:59 PM [link]

sure, toby, i'd be glad to. I am not sure quite how to .. and as I said, I'd really like a competent programmer to validate them. (Anybody out there who's expert in TC-2005?)

Their tech support supplied the basic RSI's and I combined them.

Posted by: Jock [TypeKey Profile Page] at September 5, 2006 4:20 PM [link]

Hi Bill - is there any way to get at Coxe's monthly summaries, now that they are not widely available.

Posted by: Student [TypeKey Profile Page] at September 5, 2006 4:49 PM [link]

monthly chart of the $CRB showing the tentative technical breakdown: http://stockcharts.com/h-sc/ui?s=$CRB&p=M&b=5&g=2&id=p27876235060&a=83111480

Posted by: CalexKitty [TypeKey Profile Page] at September 6, 2006 2:43 PM [link]