Tuesday 07/07/2009

Bonds continue to dance just under a thick dual layer of resistance
formed by the 50-day Moving Average and recent highs…and Bonds
might find it hard to bust through the overhead ceiling and find much
improvement today unless Stocks roll over.
After struggling most of the day, Stocks mustered a run higher late
yesterday to erase their losses and actually finish the day with slight
gains. The Dow finished a modest 44 points higher on the day, while
the S&P 500 was higher by 2 points. Overnight, European Stocks
continued the climb, after manufacturing orders in Germany reported
the highest jump in almost two years. The report helped ease some
concerns that a global economic recovery is stagnating.
But even given the positive news from across the pond, Stocks
opened lower again this morning, despite a small rebound in the price
of Oil and rumors about a potential second economic stimulus
package. Vice President Joe Biden commented over the weekend
that “the administration miscalculated how bad the jobless problem
would be”, prompting speculation that more stimulus might be in the
works during 2009. More stimulus would translate into more
inflation…and also would mean more Treasury auctions to pay for it,
creating even more supply to be sopped up. Many members of
Congress admittedly voted to pass the first stimulus package without
even reading through it, only to now look back and discover that most
of the almost $800B was not earmarked to actually stimulate the
economy, but more towards social programs. This will be an important
story to watch as it certainly could create a negative impact on Bonds
and home loan rates down the road.
With no Economic Reports scheduled for release today, Traders will
likely remain cautious and keep their eyes on the initial second-quarter
corporate results due out later this week. Also in the news this week is
another round of Treasury securities up for auction, totaling $73 Billion.
Depending on how the sale is received by the markets, it could put
pressure on Bonds, particularly in light of the recent comments on
added stimulus.
Bonds are in a tough spot, with both technical indicators and
fundamentals working against them, so a Locking approach might
normally be more appropriate. However, the picture for Stocks may
even be uglier than it is for Bonds – and a sell-off in Stocks would
mean that some of that money would find its way into Bonds and
potentially push prices higher…or at least support present levels.
We’re going to Float – but not be cavalier about it, as the current
situation needs to be monitored carefully.