Friday, May 14, 2010

Not Greeks Yet

Last night's post on the financial stocks perhaps breaking down is looking prescient today. JPM is about 4% away from taking out its February low just under $38. Its 150 day simple moving average turned down in late April, and its 50 day sma turned down yesterday. Its recent highest volume day was on April 16, on a 2 point down following achieving its high for the last few months. BofA is also looking weak, as Citi suddenly is as well.

These stock selloffs are increasingly occurring the days economic reports "exceeding expectations" are released. Classic major tops in stock prices occur during strong economies that are topping due to Fed easing.
Perhaps simply ceasing buying mortgage-backed securities is today's equivalent of rate easing?

More simply, yours truly believes that securities prices eventually seek their own level, and that is what is happening. Stock prices are historically overvalued. The only way they look cheap to reasonable is in the setting of zero short term interest rates, which themselves can only occur--circularly-- in the setting of severe economic weakness. Something is out of equilibrium.

Treasury prices have risen sharply, and no one I know believes that yields "deserve" to be as low as they are. But said yields are dropping. Patient holders of zero-coupon Treasuries such as yours truly-- who made large profits on some by selling at the peak in prices (low in yields) in December 2008 but held some and has opportunistically bought and traded others given that 4% is better than zero in a money market fund or T-bill, may be having the last laugh.

Go figure, but the long-term bull market in Treasuries remains in force on the charts. Politicians and businessmen lie, but the charts show the accumulated buying and selling pressures. All the rest is verbiage.
Treasuries are NOT in confirmed short-term or intermediate-term bull trends, but sentiment figures and chart patterns look similar to that for the USD as judged by the DXY last year as it started its ascent.

Treasuries just might be a fine trading vehicle. And who knows-- one can imagine a Republican victory in November leading to the same sort of fiscal prudence that it (allegedly) led to with a similar game-changing victory in 1994. Gridlock and all that. Stranger things have happened. A decade ago not-quite-idiots were bemoaning the upcoming shortage of Treasuries! That was a problem easily cured!!! A decade from now, could the same "problem" loom? I'm with you, I don't think so, but the fact that we all agree proves that that belief is to a significant extent "in" the market. So I'm watching the market action. Stocks go down, Treasury prices rally. So whether or not one was in a frat or sorority in college, we're not Greece. At least not yet.

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