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Buzz on the Street: When Federal Reserve Doves Cry

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A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.

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All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter.

Here is a small sampling of this week's activity in the Buzz.



Monday, July 8, 2013

Feed Me!
Fil Zucchi


As you can see on the chart below, the monthly TDST Setup indicator has had a flawless record of marking tradable highs/lows for the PowerShares DB Agriculture Fund (NYSEARCA:DBA), and it should complete yet another TDST Buy Setup at the end of July. Incidentally, by the end of the month there's also the likelihood that DBA will complete a weekly TD Sequential Combo Buy 13, which remains outstanding from when the TDST Level Down was broken on a qualified basis. The coincidence of selling exhaustion indicators on multiple longer-term time frames, would provide a very low risk entry point. The one double-edge variable on the monthly chart is whether the Buy Setup will complete above or below the TDST Level Down at $23.79. If the former, all the ducks would then be lined up to get long; if the latter it may be a closer call.


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Breaking Bad or Breaking Out?
Brandon Perry


I am scanning through sectors to get some clues for the next direction. I see a lot of sectors breaking out over their respective downtrends today. Transports, retailers, and several others. Oh and by the way, have you looked at the banks lately? These are usually bullish continuation sectors when leading. Just sharing what I see.

As I run through these sectors, I am going back into portfolio mode and adding back select names as we have recaptured the 50 day moving average in the S&P 500 (INDEXSP:.INX). I too, am surprised by both the brevity and shallowness of the correction, but now is a great opportunity to buy high-quality stocks.


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NQ and ES Levels
Marc Eckelberry


NQ (Nasdaq 100 future) found support Friday at the July 3 naked VPOC of 2929 and is trying to work its way up to the June 19 naked VPOC at 2986.75. That same move for ES (S&P futures) would put upside risk now at 1643.50. Looking for confluences up there, we have the ES weekly R1 at 1642.25. Closing above those levels would pretty much be the end of the line for bears. But this is Monday, and the week before option expiration week with a lot of headlines to boot. In fact, such a big open before all the upcoming events is a bit suspicious, to say the least. Levels where bears regain strong control would be below ES 1620 and NQ 2946.75.




Tuesday, July 9, 2013

GLD Update
Jeffrey Cooper


Gold (NYSEARCA:GLD) gapped down last Wednesday in an attempt to discredit the Gilligan buy signal it left on June 28.

However something funny appears to be happening on the way to the bear cave and another leg lower.

GLD is offsetting last Wednesday's gap and is verging on attacking last weeks high which will turn the Weekly Swing Chart up.

If the turn up plays out and GLD extends it is in a stronger position to attack its overhead 50 dma.


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10-Year Notes Surge Higher: Bull Trap?
Vadim Pokhlebkin - Elliott Wave International


This past Friday, yields on the 10-year US Treasury note saw their biggest jump since August 2011. But on Monday, the tens rose (and yields fell). Is it a bull trap, or is the reversal for real?

To help answer that, let's turn to Elliott wave patterns. The basics are simple: five waves in the direction of the main trend (an impulse), and three waves against it (a correction). Impulses are strong, fast, and with little internal overlap; 3rd waves are usually the strongest. Corrections, on the other hand, are hesitant, choppy moves.

With that in mind, please take a look at the chart of the 10-year U.S. Treasury notes, below.

As you can see, prices have moved swiftly lower in recent weeks, with little overlap. Yet the upward push from 124-115 has had the opposite look and feel. That's why the ongoing price spike most likely is part of the developing upward correction, an ABC.

The larger-degree wave 1 (circled) is now labeled complete at 124-115. The five-wave advance off the low is now the first leg of an ABC zigzag, the developing wave 2 (circled).

This wave count opens the door for additional strength within the 125-235/126-100 area. Pivotal, near-term support lies at 126-100.

(Adapted from Elliott Wave International's Interest Rates Specialty Service.)


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A Historic Mispricing
Michael Sedacca


Two weeks ago, I pointed out how the 2y5y curve was steepening extremely sharply, which would typically mean that the Fed is set to turn into an easing cycle. They are doing the exact opposite, though by all money market standards, they remain very easy in the literal sense.

The reason that this curve is steepening is technical in nature because the forward path of the Fed Funds rate does not account for any rate hikes until mid-2015, which means the 2-year will reflect a zero rate for the life of the note. The 5-year is pricing in a normalized Fed Funds rate by the 5th year (when pricing the term premium or forward rate). This is where the Fed's policy of forward guidance is blowing up in its face, but on to more important things.

This has left, in my opinion, a historic mispricing in the market, as it prices in the fastest rate of tightening in history. Unfortunately, the average Joe cannot throw around a leveraged $100mm to play a 2s5s or 2s3s flattener (selling the 2yr, buying the 5yr) in the UST market, but you can in the Eurodollar futures market. Eurodollar futures are essentially a 3-month LIBOR future, meaning betting on an implied rate for 3-month LIBOR at a certain time in the future.

Historically, 3-month LIBOR has averaged 25bps more than the Fed Funds rate. The result of this spread remaining flatter in an "easy" market is due to the complacence of everyone thinking that the Fed will buy every bond in sight or never raise rates. The jury is still out on the extent of the latter, but the former is definitely excessive.

On last Friday, the June 2015 vs June 2016/2017/2018 spreads (or 2y vs 3, 4, or 5y) all hit historically steep levels and offers an insanely lucrative risk-reward. From these levels, the spread will flatten for a variety of different reasons which I will lay out below. Playing this kind of spread trade also offers very little directional risk like outright long Treasuries, but with the same mindset that the Treasury is mispricing the rate of tightening into the future.

The spread will tighten/flatten if:

-Economic data improves at a faster rate than Fed forecasts or market forecasts as the 2-year yield will rise at an increasingly faster rate than the longer duration (2y3y has best return in this instance).

-Economic data worsens or does not improve vs Fed forecasts or market forecasts, the longer duration yields have a long way to fall if this is the case (2y5y has best return in this instance).

-Financial stress short of a catastrophe, historically, will cause the shorter-duration LIBOR futures to rise at a faster rate than longer duration.

The spread will widen/steepen if:

-The financial system undergoes a catastrophic 2008 meltdown. In that instance, LIBOR futures will price in a higher rate of financial stress further and further out as banks hedge their balance sheets against higher funding rates. This is why a number of people, myself included, were freaked out over the past few weeks because of the rate at which these curves steepened, the only other time it has happened in that magnitude was during 2008/Lehman/Bear Stearns, not even that bad during LTCM's blowup.

-The Fed changes guidance or thresholds for its forward rate policy, causing longer rates to price in a higher Fed Funds rate later while the 2-year is unmoved.

The spread will do nothing if:

-Market and Fed forecasts are right on the money. If you hold this trade longer and roll it forward, there is an equal chance that it could flatten or steepen from here, though the odds of it steepening are slim given historical spreads that have little room to steepen further.

The spread is more exacerbated in Eurodollars. For example, the spread between the June 2015 and June 2016 is 106 points while the 2y3y curve is only 32bps, and so forth the further out you go.

Please keep in mind that ED futures have 2000:1 margin leverage, so it's not a risk-free game. The spread trade is designed to reduce that risk and avoid any outright directional risk.

Charts below included for visual color are the 2y5y curve, Fed Funds rate vs Jun 2015 - Jun 2016 and Jun 2018 spreads, and Jun 2015 - Jun 2016 historical spread.

Thank you to Vince Foster and Kevin Ferry for assistance in explaining Eurodollar futures mechanics


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No positions in stocks mentioned.

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