June 22, 2013

Logical Market Update: Interest Rate War Underway Since 2009 – Cost is Trillions of $’s

Don’t be Fooled – An Interest Rate War has been underway since 2009 – Cost is $Trillions – Is the Tail Wagging the Dog? Who is in Control Here?

In a nutshell – The downward correction in treasury prices and its inverse the rise in yields (interest Rate) is far from over. It is not time to establish long positions in Treasuries. Unless you are a day trader stay out of bonds, it is much more likely that the buyers are short covering (a closing trade) – not establishing new long positions (an opening trade). I promise you, those same buyers will sell it back out to you when you believe the selling has subsided and buyers are returning. Let’s face it buying a high priced bond with historically low yields is a guaranteed loosing trade.

Many have been fed and still believe in the Conventional Wisdom theory. The status quo depends upon it. Keeping the belief going through a generalized attitude that no matter what history will prevail and everything returns to it’s own norm – right?

No, wrong – the Status Quo continues to change with or without your consent. In fact when push comes to shove it is socioeconomic cycles that matter most. They are at the core of any long-term swing in the global economies. As that core strengthens the momentum to move it in the other direction takes longer to build and actual change in direction is often overlooked or disregarded. Jumping in front of it too soon can be hazardous to one’s financial health, but the greater risk remains to those who hold on too long.

At the risk of being repetitive, the Status Quo is changing – it is not asking for your permission to change direction and denial, fear, or doubt will not divert nor prevent it from happening.

The question is not one of “when not if” anymore. The global Central Banks won’t be able to maintain the deception or control of it through liquidity. When any entity whether corporate or municipal believes that it has all the chips of control it should be ringing a bell that a trend change is going to happen. The Central Banks cannot realistically believe that they can defy gravity!

The evidence is overwhelming one-sided at this stage:

There are far to many longs in the vast treasury markets.
It took a long time to do it but the powers that be have successfully transferred much of their interest rate risk to the masses of “long-term” investors through every avenue imaginable.
The Central Banks of the world’s developed economies have been painted into inescapable corners over in most cases the last 30+ years. All the while an unsuspecting public continues to buy and hold for the long-term via their pension funds, 401(k)s, mutual funds, and investments. Investments that have a much greater probability of failure are not likely to be paid back.

Body of Evidence (Long Term Charts)

I always begin with the big picture to ground myself firmly with what has come before. Attempt to get an understanding of “time” and what economically took place during price peaks and troughs and then attempt to access what the potential possibilities and probabilities are going forward. A major point to make clear is the time frame the long-term is covering 60 years or more, so if it didn’t take 2 months to get here it certainly won’t clear itself up in that amount of time.

The misconception as I see it is that the majority still believes that over time the path of least resistance is higher – and in some cases that would be true. However, look at the yields below – they are at historical or near historical lows. So, the majority is partially correct in that the path of least resistance is higher – but in this case it will be higher interest rates (bond yields).

Federal Funds Monthly Average Yields (1954 – 2013)

U.S Treasury Monthly Average Yields (1920 – 2013)

U.S. Treasury Monthly Average Yields 10 Year Constant Maturity (1942 – 2013)

U.S. Treasury Monthly Average Yields Long-term Constant Maturity (1919 – 2013)

Inflation Adjusted Figures drive the point home on how crazy it all can get. When the biggest players (JPM, BAC, WFC, GS, C, and a host of others) openly and without conscience borrow Federal Funds at under one percent and then sell them back to the FED at 3.6% to 3.80% and then throw a temper tantrum when interest rates move fractionally higher throws off earnings estimates. What’s a few billion between friends? Check out the charts below that are adjusted for inflation. The plot thickens.

Real Monthly Average Federal Funds Rate (Inflation Adjusted) (1954 – 2013)

Real U.S. Treasury Monthly Average Yields – 10 Year Constant Maturity (1941-2013) If there is one chart that stands out as the bell weather indicator for inflation and interest rate direction it is the 10-Year Note

Concluding Thoughts

Without going into a more detailed look at the corrections that began in July 2012 the Treasury markets have moved into extreme oversold conditions. Setting up what should be a temporary reprieve from the selling and a bounce higher for prices. Ultimately though, the likelihood of rates spiking toward 5.5 to 6 % is better than 50/50. Longer-term there remains the potential for a last gasp effort by the FED to drive rates back down which hopefully will be received by bond holders as a gift to get out of long positions.

Price volatility has increased dramatically in the 30-year bond and the 10- year note. Both have futures, options, and ETFs available to trade. Volumes in the ETFs have expanded as well as in the futures making day trading the choice to participate. Before entering any trade though, please be sure to understand the risk, the tick size and liquidity.

Diversified Trading System

I continue to recommend as the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester. When implemented it allows the user to:

Immediately know the impact of parameter changes.
Automatically reads all of your DTS entries and exits
Calculates the profit/loss of each trade
Performs a wide number of essential intelligence boosting calculations instantly
Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

The last two points above are valuable tools to use. It will show you where some “tweaking” is needed to improve results through the back testing feature.

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.” Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

DJIA future (e-mini available) – Highly recommended
S&P-500 future (e-mini available) – highly recommended
Russell 2000 future (e-mini available) – highly recommended
NASDAQ 100 future (e-mini available) very highly recommended
US$/Euro futures (e-mini available) – very highly recommended
GS (Goldman Sachs) – good two way volume –
AAPL (Apple Computer) – very highly recommended
GOOG (Google) – very highly recommended
LNKD (LinkedIn) – solid intraday range
NFLX (Netflix) – solid intraday range
TSLA (Tesla Motors) – highly recommended
30-yr Treasury Bond future – did not get quiet – opposite took place
10-yr Treasury Note future
TLT (Treasury Bond Long ETF)
TBT (Treasury Bond Short ETF)
Gold (futures and ETF – GLD)
Silver (futures and ETF – SLV)

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