2/17/2009

It's the heat of the moment, with Stocks under heavy selling pressure and Bonds
reaping the benefit. Traders may be caught up in panic mode, as bad economic
news from around the globe is capturing all their attention. With no place to hide,
Bond prices are improving as money flows into Bonds as a temporary safe haven.
Technically, Stocks are near a very important level, with the Dow testing support
near the lows set back in November. The Dow's closing price was 7552 back then,
with intra-day lows at 7449. Today's low so far was 7553 - pretty amazing. But the
benchmark S&P 500 had set its lows in the 740 - 750 area back in November. The
current price is just under 800, which allows for additional downward movement in
stocks before that floor is tested. Will the Dow floor hold? It's hard to say, but a
break beneath the Dow floor will make the drop in the S&P down to 750 a pretty
sure thing. What's this mean for bonds? So long as stocks remain under pressure,
bonds should benefit. But if the floor in the Dow holds, Stocks will bounce higher at
the expense of Mortgage Bonds. And the FNMA 4.5% is also trading right up close
to an important technical juncture as well...read on.
Yesterday, Japan reported that its economy shrank 3.3% in the 4th quarter, the
most since the 1974 oil crisis. Japan still remains the world's 2nd largest economy.
And in other news, if you though Geithner's press conference was bad last week,
how about this - Japan's Finance Minister Shoichi Nakagawa (Japan's version of
our Treasury Secretary) resigned after coming under fire for speaking incoherently
and slurring at a G7 Press conference in Rome. There is heavy speculation that
the Finance Minister was drunk, although he claims to have been on cough
medicine...looks like a heavy dose to us. You can watch the spectacle on TV or
YouTube today and decide for yourself if this was cough medicine or an
overabundance of Rome's wine.
In economic news, manufacturing in the New York area contracted at a record pace
in February, falling 34.7, far worse than expectations of a 23.75 drop. One bright
spot - WalMart Stores posted a quarterly profit that actually beat expectations. And
since WalMart is such a huge indicator of the retail sector, this is pretty positive
news.
Mortgage Bonds will have to break above a triple layer ceiling of resistance to make
significant gains higher. So the floor in the Dow is also important for Bonds, as a
fall lower in stocks will allow bonds to break above the ceiling. But if stocks can
bounce of the Dow floor, bonds will run out of gas at the overhead ceiling, and it will
be time to lock. We are in float mode as the drama plays out.