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Risk Aversion Rules the US Treasury Yield Curve


It continues to keep the yields low.

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

We're in the midst of what used to be called a US Treasury Quarterly Refunding. The US Treasury used to raise its needs in the note and bond markets in just February, May, August, and December.

Now, because of the huge and growing budget deficit, we have monthly auctions in two weeks of every month. Many economists and strategists say we're in a Treasury Debt Bubble, but I disagree.

So far this year the yield on the 10-Year is down 20.6 basis points and is richer than my semiannual pivot at 3.675, which indicates that risk aversion is trumping supply and inflation concerns. My monthly resistance is 3.504.

Source: Thomson / Reuters

I rate Tuesday's $40 billion 3-Year auction a B+ with that yield at 1.377 with a bid to cover at 2.83 and indirect bid of 51%. Today's auction is $25 billion 10-Year notes.

On Thursday the US Treasury auctions $16 billion in 30-Year bonds, which is important from a ValuEngine prospective. Fair value of any stock is primarily based on 12-month trailing EPS, 12-month forward EPS estimates from Wall Street, and the yield on the 30-Year Bond. A higher yield makes stocks less undervalued and more overvalued.

Comex gold tested my weekly resistance at $1083 on Tuesday and remains above its 200-day simple moving average at $1020 since January 23, 2009. The weekly chart is negative with annual support at $939 and monthly and annual resistances at $1094 and $1115.

Nymex crude oil has a negative weekly chart with quarterly support at $67.22 and the 200-week simple moving average as resistance at $76.18.

Source: Thomson / Reuters

The euro is negative but oversold on its weekly chart with my weekly pivot at 1.3636 and the 200-week simple moving average at 1.3872.

Source: Thomson / Reuters

The only major average without a negative 21-day and 50-day moving average crossover is the Russell 2000, but that should end today with these averages converged at 618.98 and 616.11.

Source: Thomson / Reuters

The weekly chart for the Dow is negative with the broken ascending wedge and with the Dow back below the down trend that goes back to October 2007. That's the breakout followed by the fakeout. Friday's low is 9,835 with daily and weekly pivots at 10,071 and 10,144, which was nearly tested on Tuesday. A close in February below 10,067 keeps the monthly key reversal in play.

Source: Thomson / Reuters

ValuEngine Valuations --
Sometimes it's tough to mix the oil of fundamentals with the water of technicals and this is the case today. 62% of all 4,500 stocks are undervalued with 38% overvalued. 31% are undervalued by 20% with 16% overvalued by 20%.

Even so, the ValuEngine Forecasting Model shows too many stocks with sideways to down risk over the next 12 months. The technicals favor a sell strength environment so you see the dilemma in stock selection for both long and short positions.

ValuEngine shows eight of 11 sectors as undervalued, which means that the oil of more positive fundamentals isn't mixing with the water of negative technicals. I'm not going to become a bull on stocks until all 11 sectors are undervalued as they were on March 5, 2009, when the undervalued readings were between 32% and 42%.

Source: Thomson / Reuters

Since the 21st century began there have been only a few cases where oil and water mixed to yield great macro market timing events. I started using ValuEngine in 2002 and valuations were extremely undervalued in the second half of that year with oversold market technicals helping me to time the market bottom in October 2002.

They lined up similarly in March 2003 as our troops marched toward Baghdad to start the Iraq War.

Then there was the March 2007 to October 2007, where I was prematurely bearish citing overvalued and overbought markets. Because of deteriorating FDIC data from Quarterly Banking Profiles I predicted on March 1, 2007, that the US economy would be in recession in 2008/2009 with GDP at the end of 2009 below the end of 2008 for the first year-over-year decline since 1948/1949. The bear market finally began with the Dow above 14,000 in October 2007 when I warned, "Beware of the Ides of October" as the next 2,000 points for the Dow would be down, not up.

Two of my 10 predictions for 2010 continue this general theme:

The FDIC Quarterly Banking Profile is the balance sheet for the US economy and its deterioration is a leading indicator that economic growth will be muted to negative in 2010. In the first three quarters of 2009 total assets declined $596 billion to $13.25 trillion. I see bad loans rising throughout 2010 and beyond. Commercial real estate will be the subprime of 2010.

The multi-year bear market for stocks is over, but a new bull market isn't in the cards. There can't be a bull market for stocks with 10 of 11 sectors overvalued according to ValuEngine (this was the configuration at the end of 2009). The Dow could trade to 11,250 to 11,500, but a weekly close below 10,379 signals at least 20% of downside risk. For now we're alleviating a short-term oversold condition.

Send me your comments and questions to
No positions in stocks mentioned.

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