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business newsMessage of the Markets: Low Bond Yields Signal Underlying Economic Weakness
If interest rates blow through the all time lows from 2008, the ugliness causing such action in the bond markets would be something nobody would want to experience.
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So, where may Treasury yields be headed? How much lower are they likely to go? The chart below shows the yield on the 10-Year US Treasury Note (^TNX) on a weekly basis going back to 2001. I’m working under the assumption that we are not Japan and that the bottom in rates in 2008 was THE bottom. Even in that case, we could still see a test of that low in rates at some point (soon). The wave count indicated on the chart has this downside wave being the C wave of an ABC correction off of the wave 1 peak in early 2010. Let us all hope that this is the case because if rates blow through the all time lows from 2008, the ugliness causing such action in the bond markets would be something nobody would want to experience.
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The persistent weakness in the KBW Banking Index (^BKX) has been well documented for quite a while now. What is the cause of this? How can they not be making money hand over fist with their cost of borrowing near zero and their ability to lend out at 5% or higher in the mortgage markets? Maybe they just aren’t collecting mortgage payments. I know that sounds crazy, but I can tell you from a south Floridian’s perspective that people just don’t have the same fear of missing payments that they used to. There’s much less of a social stigma associated with dinging up credit due to one's housing situation. Many down here just aren’t paying and are “playing the game” with the banks for as long as they can. In such an environment, why would banks want to make new loans easy to obtain? The answer is that they won’t -- and I can’t say that I blame them.
Evidence of the lack of credit can be seen in the Philadelphia Housing Stocks Index (^HGX). While the index is well off of the 2008-2009 lows, it is acting less than bullish right now. The weekly chart below shows us that the uptrend line has been broken and new lower lows are being made (yellow circles). The only hope for the HGX is for the 100% Fibonacci price projection line to hold up at the 94.90 level. That level happens to correspond with a high congestion area / horizontal line support on the chart. If 94.90 holds up on a weekly closing basis, there may still be hope for the housing stocks. We really need this sector to start perking up (along with the financials) in order for me to start being more optimistic on the long-term prospects for the broader market.
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The optimisim and hope that one might conjure up by looking at the HGX chart is quickly squashed when looking at the other key housing-related chart -- lumber futures (LB.P). The weekly chart of lumber below shows nearly a perfect downtrend channel with the price quickly approaching the lower end of it. Unfortunately for the hopeful bulls out there, there could be another 60 points or 30% of downside left before this move is over (assuming the bottom edge of the channel is touched). What causes lower lumber prices? Lower demand, especially from the housing sector.
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Moving on to the currency markets, I wanted to touch on the chart of the Australian Dollar, specifically the Aussie / US Dollar cross (AUDUSD). I mentioned recently that the AUDUSD (first chart below) was in a powerful uptrend line and that the ideal entry point for a long-side trade would be on a test of that line. Well, now we’re seeing that test. If you’re so inclined, take a position either in the AUDUSD in the forex market or in the Currency Shares Australian Dollar ETF (FXA). Understand that all things risk- and commodity-related are under pressure and that there is the very real risk that the uptrend line is violated.
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Overall, I don’t think I’m Moses coming down from the mountain with the tablets when I say, “THE RISK TRADE IS OFF” for now. You can monitor the TRIN readings and the RSI levels on the indices to try to pick good entry points for oversold bounces. However, those should be “make ‘em to take ‘em” trades instead of long-term buy and hold plays. Be careful out there!
Twitter: @tttechnalytics
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