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The Risks and Rewards Coming in 2010

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US Treasurys and the Dow are not very favorable.

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


The weekly chart for the 10-Year yield favors higher yields in 2010.


The down trend for the 10-Year yield that goes back to June 2007 has been broken toward higher yields. Notice the formation of the inverse head-and-shoulders bottom for 10-Year yields.


Source: Thomson / Reuters

The low yield 2.02 was set in December 2008 and the high yield since then was 4.00% set in June 2009. With these low yields in place for the past two years, my "Mortgage Mulligan" idea presented in February 2008 would have resulted in a 30-Year fixed rate mortgage range of 3% to 5%. Instead, the low yield for mortgages was 4.5%, if you were lucky.

My plan would have liquidated Fannie Mae (FNM) and Freddie Mac (FRE), putting the burden on Wall Street and investors. Instead, homeowners and home buyers have difficulty with mortgage modifications, as defaults and foreclosures increase despite program after program promising help fail.

Now taxpayers face an unlimited bailout of Fannie Mae and Freddie Mac right through 2012.

If the yield on the 10-Year can end the first two weeks of January below my semiannual pivot at 3.675, another round of risk aversion can delay the rise in yields. If my monthly pivot at 3.868 gives way to higher yields, the 200-week simple moving average at 4.06 comes into play and then the 120-month simple moving average after that at 4.40.

The resulting rise in mortgage yields will become "The Nightmare on Main Street."

The Parabolic Bubble popped for Gold after reaching $1227.50 on December 3.

I've always warned that when a parabolic bubble breaks the downside is painful, and the low on December 22 was $1075.20. The re-inflation of the bubble depends on the strength of the dollar, as a weak dollar correlates to gold becoming the currency of last resort.

My annual support is $938.70 with quarterly and annual pivots at $1084.90 and $1115.20, and semiannual resistance at $1186.50. Gold thus needs to have a weekly close above $1186.50 to begin to re-inflate.


Source: Thomson / Reuters

Crude oil had its Parabolic Bubble burst in mid-2008 and faces a prolonged trading range.

Crude oil is in a huge trading range between the July 2008 high of $147.27 and the January 2009 low of $33.20. The 200-week simple moving average, now at $75.89, has been a magnet since June 2009.

If you recall, I timed the bottom for crude oil to be $50 in January 2007, and in mid-2008 predicted $75 before $200. Most recently, I predicted that my annual pivot for 2009 at $68.81 would hold and that was the case on December 14.

In 2010 I have an annual pivot at $77.05 to be a trading range magnet as weak demand for energy battles with geopolitical risks and the weather. My quarterly support is $67.22 with annual resistance at $97.29.


Source: Thomson / Reuters

The Dollar Index shows a Thanksgiving bottom at $74.21, but there are upside barriers.


After setting the low on Thanksgiving, the dollar rebounded to my fourth quarter of 2009 resistance at $78.64 on December 22. The wild card in the longer-term bottoming process is that semiannual supports are at new lows at $73.54 and $68.74. This is the risk if my quarterly resistance at $80.23 isn't taken out by a weekly close in January. The 200-day simple moving average is a tighter barrier at $79.25.


Source: Thomson / Reuters

The Dow ended December below its 120-month simple moving average at 10,466 after breaking above the down trend that goes back to October 2007.

With the multi-year bear market arguably over, I'll be tracking the risk/reward, which shows limited upside in 2010. I show an annual pivot at 10,379 as a tight support as 2010 begins.

Weekly closes below 10,379 indicate risk to quarterly support at 6,705. Weekly closes above 10,379 indicate strength to weekly resistance this week at 10,746. The best case for 2010 is my rolling six month risky area refined between annual resistance at 11,235 and semiannual resistance at 11,442.


Chart Courtesy of Thomson / Reuters

Send me your comments and questions to Rsuttmeier@Gmail.com.
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No positions in stocks mentioned.

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