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A Rally in Ye Ole Yield Land


As ten year yields tagged last year's high someone let them have it - someone was willing to bid big as yields gapped up on Wednesday morning.

And when Monday comes round
There's high lonesome sound
And she follows you down for the kill
And a white blinding light
Makes it all seem so right
And you feel like the king of the hill

Roger McGuinn/Tom Petty (King of the Hill)

Hypothetically speaking, what if once upon a time there was a king? A King of Ye Ole Yield Land. A King with a pension for games. Games like cards and a knack for counting how the deck is stacked. Hypothetically speaking of course.

Let's suppose this King of Cards, this Barron of Bonds caught a bad flop a year ago in the spring of 2006 when a joker in the house inspired his loyal subjects in Yield Land to rally around the 5.25% pole. Something unheard of and unthinkable for ages, well at least a few years. The King thought he had banished Prince Fiver

The King, who thought he had a date with destiny with Princess Four of Hearts and Queen Three of Diamonds was so devastated he had to leave. He had to go on vacation. He had to go visit the Royal crystal ball maker.

One year later, sensing another revolt in Yield Land, the King devised a plan to save the family jewels and thwart the uprising by calling in Count Capitulation. The Count saved the crown by devising a plan of genius, by flooding the moat and unleashing the hounds and disguising the King as one of the crowd as he fled over the draw…er…the drawbridge to Recession Realm before announcing to the Crowd his love for a new queen, Queen 6.25%.

He camouflaged the spike, a javelin if you will, to pop the Jacks of Debt and Credit.

Only a story like this could play out in an empire pawned for alotta pence. Yeah, that's the ticket. That fits the bill.

What will the loyal hedgehogs and other subjects do if they knock on wood and discover it's a Trojan Horse they are riding? What will the King do when he runs out of wolf costumes? He can always borrow a frog costume from Greenie and hope a beautiful damsel kisses him.

And in the land there was a wolf crying, "BOY!"

And on the charts there may have been a double top in yields from one year ago – for the time being anyway.

And in Ye Land of Yield, the javelin to Six became a boomerang to Four. Hypothetically speaking of course.

A funny thing happened on the way to the forum on Wednesday. As ten year yields tagged last year's high someone let them have it - someone was willing to bid big as yields gapped up on Wednesday morning. So who scooped up all the ten-year paper that the Street was tripping over themselves to get out of? Was someone covering a short position?

The last three weeks in the bond market is a classic picture of panic and crowd behavior. Someone shouted fire in a crowded theatre when everyone was curled up with popcorn and a Coke waiting for the feature – Honey I Shrunk the Rates - starring Bernie and the Jets, a flick that most financial critics and geniuses had highly recommended.

As the ten-year bond carved out a Key Reversal Day, equity traders heaved a sigh of relief which turned to hyperventilation as the Beige Book beamed up the bulls like an episode from Star Trek. When the dust settled the DJIA scored the biggest gainer of the year.

It's a long way from Morgan Stanley's "Full House Sell Signal" last week to the DJIA's Full Gainer yesterday.

The behavior and the pattern is remarkably familiar to the spring break – the February/March decline which saw two 90% down days which were eventually offset as the DJIA exploded to record after record.

Last week on June 7th another 90% down day was recorded and yet here we are a week later with the market shrugging off multiple sell signals from Wall Street firms and the worst rout in the treasury market in three years and the DJIA is doing a Samba to its best day of the year. Ironic, just as everyone thought the music had stopped and went lunging for chairs.

As the hourly chart below shows, the S&P has covered a lot of ground over the last six days: 1540 to 1490 to 1515 back to 1490 and back to 1515. That's 125 points in six trading days or about eight percent of the total value of the S&P.

Head's up. The S&P could pull back to 1500 with out damaging the bullish case.

Although the S&P appears to have traced out a successful test of the 50 DMA, The overhead 20 DMA 1518 may act as some resistance.

The market has been behaving like a hyperventilating Faye Wray in the grip of Hoofy in drag as a Volatility Kong on the spire of the Empire State Building swatting at two engine ten-year paper and Wall Street strategists trying to shoot him down.

And it's not over yet, Thursday morning more economic data points could spark another round of this options expirations clown car Bowling for Strikes ice escapade.
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