Yesterday's Market

Yesterday, prices traded between two important technical levels, the first established over a week ago (a) and the second from the previous days trading (b).


Prices moved lower at the open but found support from the previous days levels (a). Prices consolidated in a triangle pattern for the first bit of trading (b) broke through resistance anbd rallied higher forming two more triangles to consolidate gains (c). Prices hit resistance at levels established over a week ago (d) and then sold off into the close on rising volume (e).





Notice how the three largest market sectors of the SPYs -- technology, financials and health care -- have been trading in a range for the last few months.


The long end of the Treasury curve -- the TLTs -- has moved back above the long-term trend line (a) and has moved moved through important resistance as well (b). Also note that prices have gapped higher (c), indicating a several mis-match between supply and demand.


The gold market is once again in an uptrend (a). Also notice the shorter EMAs are about to cross over the longer EMAs (b) and the MACD has a lot of room to run as prices move higher (c).


Yesterday the cattle market hit a 6-month high.

GM Going Public

From Marketwatch:

General Motors Co. on Wednesday is expected to file for a long-awaited public offering that will take its place among the biggest IPOs in history and set the stage for the U.S. government to exit the car business.

The company is reportedly looking to raise up to $16 billion, with the U.S. Treasury selling some of its shares. For taxpayers to fully get their money back, the public offering likely has to bring in about $70 billion.

The latest retail sales figures show that auto sales were strong last month and the latest industrial production numbers were strong, partly as a result of auto production.

Finally, consider this chart:


Auto sales have risen from a bottom, but have a long way to go before they hit previous levels. It's also important to ask whether or not we'll see auto sales rise to that previous levels anytime soon considering the consumer retrenchment we're seeing along with a high unemployment rate.

Senior Loan Officer Survey

From the Federal Reserve:

The July survey indicated that, on net, banks had eased standards and terms over the previous three months on loans in some categories, particularly those categories affected by competitive pressures from other banks or from nonbank lenders.² While the survey results suggest that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks.³ Most banks reported that demand for business and consumer loans was about unchanged.

Domestic survey respondents reported having eased standards and most terms on C&I loans to firms of all sizes, a move that continues a modest unwinding of the widespread tightening that occurred over the past few years. Moreover, this is the first survey that has shown an easing of standards on C&I loans to small firms since late 2006.⁴ Significant net fractions of domestic banks also reported having eased their pricing of C&I loans to firms of all sizes. Banks pointed to increased competition in the market for C&I loans as an important factor behind the recent easing of terms and standards. Demand for C&I loans from large and middle-market firms and from small firms was reportedly little changed, on net, over the survey period after declining over the three months prior to the April survey.

On net, large domestic banks reported having easing standards and terms on almost all of the different categories of loans to households. Other banks showed either smaller net fractions having eased lending policies or a net tightening of lending policies. Regarding residential real estate lending, a few large banks reported having eased standards on prime mortgage loans, while a modest net fraction of the remaining banks reported having tightened standards on such loans. Banks reported an increased willingness to make consumer installment loans, on balance, for the third consecutive quarter, and small net fractions of banks reported having eased standards on both credit card and other consumer loans. By contrast, small net fractions of respondents reported having tightened the terms and conditions on credit card loans.

Here are charts of the relevant data:

While C and I lending standards area still easing, demand (the lower box) is still weak.

As with the C and I loans, standards are easing, but demand is still weak.

Note that residential demand (the lower box) is fair at best.

Most importantly, consider these charts:


Above is a chart of commercial and industrial loans outstanding plotted on a logarithmic scale. Notice that it typically contracts around recession. While the current situation is more severe, it is hardly unprecedented; in fact, it's the norm.




While real estate loans appear to be less effected by the economic cycle, they, too, have decreased around recessions as well.

Finally -- and this bears repeating -- the charts above from the Federal Reserve indicate that weak demand is just as responsible for the drop in credit that we've seen over the last few years. Banks are doing what banks typically do during recessions -- they are rebuilding their balance sheets. But we're also seeing a consumer retrenchment, which I suspect will be going on for some time. To that end, see this post from yesterday.

How Pavlov's dogs explain the sputtering Recovery

- by New Deal democrat

I. The role of Fear is the missing element in analyses of the recent downdraft

By April of this year, virtually every economic indicator pointed to recovery: not only had GDP regained nearly 3/4's of its 2008-09 loss, but industrial production, manufacturing, and consumer purchasing were on a roll. Beyond that, early indicators by way of temporary hiring had given way to strong hiring in the general economy. Even real income had picked up slightly. On Monday an article at CNBC's website confirmed my writing last week that:

Despite all the gloom and doom about the US economy, the private sector actually created 620,000 jobs over the past seven months, far faster than in the previous two recessions. generating between 200,000 and 300,000 new jobs (excluding census workers) each month.

Then, suddenly, it seemed like the bottom fell out. GDP in the second quarter is likely to ultimately be tallied well under 2%. Industrial production in June barely budged. Manufacturing cooled off. Retail sales fell over 1% in May and another 0.3% in June. Even worse, non-census hiring came to a screeching halt: about +20,000 in May, -21,000 in June, and again +12,000 in July. Talk of a "double-dip" second downturn, which had all but disappeared into the shadows in April, returned with a vengeance by July, with prominent bears like David Rosenburg proclaiming that there was better than a 50/50 chance that a second leg down was to ensue. Permabears like Mish crowed.

It wasn't as if some Doom Fairy had come along and waved her black magic wand over the economy -- there were real reasons for the downturn in some of the statistics. Oil briefly at almost $90 equated to 4% of the GDP, historically the tipping point between expansion and oil shock induced recession. The explosion and sinking of BP's well in the Gulf of Mexico was an economic disaster for the Gulf of Mexico secondarily to an environmental catastrophe. The expiration of the ill-conceived $8000 housing credit caused demand to crater, subtracting about 100,000 housing starts a month, and leading to more construction and real estate industry layoffs. The failure of Congress to pass adequate and timely relief for state and local budgets meant that nearly 100,000 layoffs that would have happened last year, and could have been averted again this year, in fact took place in June and July.

But the abrupt halt in private sector hiring and cliff-diving decline in consumer spending in May defy explanation based just on the above list. A whole host of indicators all pointed to more robust job growth -- ISM manufacturing, temporary help hiring, durable goods orders, real retail sales, and for good measure the Conference Board's (which publishes the LEI) Employment Trends Index:



Instead, something happened in late April and early May to make employers and consumers alike suddenly freeze in their tracks. That something was fear.

And that is where Pavlov's dogs come in.

II. Sometimes, they *do* ring a (psychological) bell at tops

As I said last week, *why* there was such a sudden downdraft in the economy is something that economics itself does not explain well. For that, economists need to take a walk down the hall or to the faculty lounge and have a chat with their colleagues in the psychology department. I contend that what happened in April and May is a classic case of "classical conditioning."

Classical Conditioning is the type of learning made famous by Pavlov's experiments with dogs. The gist of the experiment is this: Pavlov presented dogs with food, and measured their salivary response (how much they drooled). Then he began ringing a bell just before presenting the food. At first, the dogs did not begin salivating until the food was presented. After a while, however, the dogs began to salivate when the sound of the bell was presented. They learned to associate the sound of the bell with the presentation of the food. As far as their immediate physiological responses were concerned, the sound of the bell became equivalent to the presentation of the food.
....
In Pavlov's experiment, the sound of the bell meant nothing to the dogs at first. After its sound was associated with the presentation of food, it became a conditioned stimulus. If a warning buzzer is associated with the shock, the animals will learn to fear it.

Classical conditioning doesn't just happen in the lab. Here is a perfect example, by John Cole of the blog "Balloon Juice" asking his dogs if they want to go for a w-a-l-k:



Not only do Cole's dogs, like most doggie pets, go just about berserk when their owner says the word w-a-l-k, but Cole further wrote that

because I foolishly previewed the video and the piglets overheard it, I have two dogs dancing around my feet who want to go for walks.

That, dear readers, is classical conditioning. The dogs associated the word with the act. And of course, it's not just dogs, humans react to classical conditioning as well (want to bet Cole reacted to his pets' whining by actually taking them for walks?). For example, just last week it was reported that

The first time you burn your fingers by touching a hot stove you get the lesson to avoid doing it in the future. And now scientists are trying to know what exactly goes on in the brain that triggers such avoidance behaviour in a study on fruit flies.

Just as Pavlov's dogs learned that a buzzer meant a painful shock, so most people don't have to touch a hot stove twice to learn to avoid it.

III. Classical conditioning and the Panic of 2008

As is often the case, Prof. Paul Krugman said it best: "This is not your father's recession -- it's your grandfather's."

The Panic of 2008, or the "Great Recession", was the first deflationary bust since 1938. That's 72 years ago and no economic decision-makers either on the corporate side, or meaningfully on the consumer side, recall that recession. Deflationary panics are a new event to all of us. Or, in psychological terms, a new stimulus, to which economic actors responded. Back then, I wrote a piece called Black September, showing how in large part it was panic -- by President George Bush, Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, Rep. Barney Frank and Sen. Christopher Dodd among others -- who day after day told several hundred million Americans that their paychecks were going to bounce if they didn't give $700 million to Wall Street immediately -- that created a corresponding abrupt halt in spending by consumers. As one auto dealer said at the time:

On about September 10, we saw our business fall off 30-35%.

Calculated Risk accurately surmised at the time that tens of millions of American families had discussions around the dinner table amounting to "Wow, this is bad. Let's make sure our money is safe, and watch our expenditures." and thereby made the recession worse.

Not only did consumer spending fall off a cliff beginning in September 2008, employers were caught flat-footed as well. As shown in this graph of insider buying and selling from Barron's in early 2009, while insiders had at times sold during 2008, they were also significant buyers of their own company's stock at several of the temporary bottoms in the market that predated the September - October crash:

So, when the sudden collapse in consumer spending hit, employers panicked as well. As one observer put it shortly after, "If employers needed to lay off 20, they laid off 40 just to be sure."

This was the equivalent of both employers and consumers hearing a shouted warning just before they touched a hot stove. They reacted immediately and drastically to the "buzzer" (the panic in their public officials) that did actually turn out to precede very painful stimuli (a collapse in consumer demand, and over half a million layoffs a month for over half a year).

What both employers and consumers learned in September 2008 and immediately thereafter, was to be alert for signs of a "Credit Freeze!" because if one occurred, very bad things were about to happen.

IV. April 2010

Fast forward to springtime this year. The recovery is proceeding in V-shaped fashion in both GDP and manufacturing terms. While the consumer end started late, nevertheless since late 2009, both real income and then jobs started to increase. So well was the economy doing by the end of the first quarter that all the signs were that the hiring of March and April was likely to continue, as consumer spending and business capital purchases both moved forward.

But in the background, another event began to unfold. Since the minor crisis in Dubai last December, bond yields and stock prices began to move in tandem as investors began to worry about sovereign defaults. The bears looked around for who might be the next sovereign to run into trouble, and the answer wasn't difficult to discern: Greece.

In March the Greek crisis began exploded onto the global financial news with news of rioting that included several deaths. Worse, as bear raids were mounted not just on Greek bonds, but on Spanish, Portuguese, and other bonds as well, some of the leading European politicians and financial officials resembled mirror images of Bush et al from September 2008. For example, by April 19,

German finance minister Wolfgang Schauble [ ] pleaded with his country's citizens to back a joint EU-IMF bail out for Greece worth up to €45bn (£40bn), warning that failure to act risks a financial meltdown.

Then, most infamously, Angela Merkel, the Chancellor of Germany, foolishly ratcheted up panic by proclaiming publicly that

"The current crisis facing the euro is the biggest test Europe has faced in decades. It is an existential test and it must be overcome ... if the euro fails, then Europe fails."

A second round of bank failures, and even widespread sovereign defaults in Europe were openly discussed in the media.

It was against that background that the additional blows of the BP Gulf of Mexico disaster that began with the explosion of April 20. Ten days later, the $8000 mortgage credit expired, and by May 19 purchase mortgage applications had falled to a 13 year low. On May 6, there was a 10 minute "flash crash" of 1000 points on the Dow Jones Industrial Average -- which has still not been fully explained. The ECRI weekly leading indicator -- which had gained notoriety with the group's gutsy recovery call in March 2009 -- plunged back into negative territory, and was widely reported in the media. And states and localities warned about draconian cuts of personnel and services in summer if Congressional emergency funding didn't come through.

It is important to note that, except for the BP disaster, none of the actual economic consequences of any of these items were actually being felt yet. But what employers and consumers thought they were hearing -- especially due to the Euro crisis -- was a warning that we were about to endure another Credit freeze! To use the "hot stove" analogy, they heard a warning that they were about to touch one again. Once burned, twice shy.

And they reacted the way they had been classically conditioned by September 2008 to act. Employers froze hiring plans immediately. And consumers cut back on spending, retrenching in fear of another round of 100,000s of layoffs. Only that explains the precipitous halt in employer hiring, and consumer spending, that took place immediately in May and continued in June.

V. Sometimes hearing the word w-a-l-k doesn't mean you are going for a walk

Just as John Cole didn't actually plan on taking his dogs for a walk when he played back the video of his dogs' reactions to his using the word, so the Greek crisis didn't actually metasticize into a "credit freeze." The European Union made credible guarantees about their backing of the Euro. Libor - a measure of bond market stress - which rose dramatically in the March - early May period, declined more than half of that since, a sign that most of the stress has passed:



And most of the other crises have passed as well. BP finally capped its well in mid-July. Mortgage applications bottomed in mid-July as well, and have ever so slightly improved in the four weeks since. The DJIA rose 10% from its early July bottom. Congress passed at least some relief for the states. Only Oil, still ranging between $70-$82 a barrel, remains an unresolved drag on the economy.

There are signs that consumers have come back out of their cave. July retail sale were up 0.4%, the first gain in real, inflation adjusted retail sales since April. Housing permits rose slightly in June, and then fell again slightly back to May's levels, in July. It seems that consumers have begun to decide that the "credit freeze!" may not happen again after all. On the employer side, hiring of temporary help has resumed, as the American Staffing Associaton's index just reached a two-year high.

Of course, the fear of a steep downturn could yet be a self-fulfilling prophecy. Recall my quip above. When he played back his video, John Cole hadn't intended to take his dogs for a walk, but the dogs thought otherwise. He may well have given in and taken them for a walk after all.

On the other hand, if he didn't, Cole's dogs probably settled back down. Similarly, while the loss of 100,000 in housing starts is a blow, it need not create a "double-dip", and states and localities may be able to pull back from the worst with the new infusion of federal cash (together with improving tax receipts). A near zero GDP for the third quarter looks baked in the cake. But if there isn't another "exogenous event" like the BP catastrophe in the next couple of months, and if there are no renewed fears of a "credit freeze!" in Europe or elsewhere, consumers may gradually resume their spending habits from before May, and private employers may resume hiring at spring's pace.

Yesterday's Market

Yesterday, prices gapped higher at the open (a), and then on declining volume found support at the EMAs where prices jumped higher (b) on rising volume. After rising, prices again found support at the EMAs (c) and rose a bit higher. But prices then started falling, and found resistance rather than support at the EMAs in the afternoon (d, e and f). Finally, notice the increasing volume in the afternoon.



Notice how prices found resistance at key levels from several days ago (a).




The bond market is still in the middle of a strong, 10-day rally (a). Notice the large number of gaps higher (b), usually followed by periods of consolidation (c).

After moving through the 80/bbl area (a), oil fell through the 80 area, with prices now below the EMAs (b). Notice the increased volume on the sell-off (c) and the sell signal from the MACD (d).





Notice how quickly the EMA picture can change. About two weeks ago the EMAs were moving into bullish territory with the shorter EMAs above the longer and the shorter EMAs rising (a). Now the shorter EMAs have crossed below the 50 day EMA indicating a short-term bearish orientation to the market.


Finally, the cattle market is in a clear long-term uptrend (a). Prices have consolidated along the way (c) and are currently approaching six month highs (b). However, there is a question whether or not prices can keep up the momentum (e).

Household Debt Decreasing

From Bloomberg:

American households pared their debts last quarter, closing credit card accounts and taking out fewer mortgages as unemployment persisted near a 26-year high, a survey by the Federal Reserve Bank of New York showed.

Consumer indebtedness totaled $11.7 trillion at the end of June, a decline of 1.5 percent from the previous three months and down 6.5 percent from its peak in the third quarter of 2008, according to the New York Fed’s first quarterly report on household debt and credit.

The report reinforces forecasts for a slowing economy in the second half of 2010 as consumers hold back on spending and rebuild savings. The Fed last week said the recovery would be “more modest” than it had anticipated and announced it would keep its securities holdings at $2.05 trillion to prevent money from draining out of the financial system.

Consider the following charts:



Debt service payments are decreasing as a percentage of disposable income.



Total household debt outstanding is decreasing,



Largely as a result of a decrease in revolving debt.




While non-revolving debt has been stagnant.

Indusrial Production Increases 1%

From the Federal Reserve:

Industrial production rose 1.0 percent in July after having edged down 0.1 percent in June, and manufacturing output moved up 1.1 percent in July after having fallen 0.5 percent in June. A large contributor to the jump in manufacturing output in July was an increase of nearly 10 percent in the production of motor vehicles and parts; even so, manufacturing production excluding motor vehicles and parts advanced 0.6 percent. The output of mines rose 0.9 percent, and the output of utilities increased 0.1 percent. At 93.4 percent of its 2007 average, total industrial production in July was 7.7 percent above its year-earlier level. The capacity utilization rate for total industry moved up to 74.8 percent, a rate 5.7 percentage points above the rate from a year earlier but 5.8 percentage points below its average from 1972 to 2009.

This is a great number, plain and simple. First, auto manufacturing is jumping. That indicates two things. First, demand is increasing. This is evidenced by the increase in auto sales in the latest retail sales numbers. Secondly, there have been stories about auto dealerships being under-supplied. I think the auto companies are cranking up production to increase inventories.

But we're seeing a healthy .6% increase without auto production. And according to the report, the increase was broad based.

Here are the relevant charts:


The chart above shows that all areas of production increased. In addition, notice that capacity utilization has been increasing as well on a consistent basis.


While still below the pre-recession levels, industrial production continues its upward climb.


Capacity utilization also continues to increase.

We've seen some weakness in the manufacturing numbers over the last few months. Considering the overall strength of this number I have to wonder if that trend will continue.

Empire State Increases, BUT ...

From the NY Fed:

The Empire State Manufacturing Survey indicates that conditions improved modestly in August for New York manufacturers. The general business conditions index rose 2 points from its July level, to 7.1. The new orders and shipments indexes both dipped below zero for the first time in more than a year, indicating that orders and shipments declined on balance; the unfilled orders index was also negative. The indexes for both prices paid and prices received inched down, while employment indexes were positive and higher than last month. The six-month outlook weakened; though future indexes were generally still positive, many fell in August, with the notable exceptions of the future employment and capital expenditures indexes, which climbed after falling last month.

Here is a chart of the data:



Manufacturing pulled the economy out of the recession. Now it appears it is losing steam.

Part of my thesis for this recovery is that various parts will emerge at various times, but there will not be a cohesive "expanding on all fronts" scenario. That is, instead of having consumers and manufacturers humming along at the same time, we'll see very lumpy growth. Manufacturing has provided part of the first leg of the recovery. Now we'll see if other parts of the economy pick-up.

Yesterday's Market

Let's start in the cotton market, which is near multi-year highs.



The chart is classic break from a consolidating area. Prices have moved through resistance (a and b) and have consolidated their gains along the way (c). Also note that prices have printed strong bars after the consolidation. The EMAs are very bullish -- the shorter EMAs are above the longer EMAs and all the EMAs are moving higher (d). Also note that momentum is increasing (e).


The wheat market is cooling off a bit. Prices have fallen from their highs (a), consolidated in a triangle pattern along the 10 day EMA (b) and are now using the 20 day EMA as technical support (c). Prices have broken the long-term uptrend (d) and the MACD has given a sell-signal (e).



Soy beans have risen in sympathy with wheat. Prices are in a clear uptrend (c). Prices have moved through resistance (a) and have consolidated gains (b) using the EMAs as support (b). The EMAs are bullish (d) but the MACD is losing its momentum (e).


The bond market is still in a very strong rally. First, note that prices have moved strongly above the trend line (a), gapping higher and printing strong bars (a).



On the technical side, the EMAs are still very bullish (a) -- all are moving higher and the shorter are above the longer. We're seeing more money flow into the market (b and c) and momentum clearly move higher (d).


Yesterday, prices gapped lower at the open (a), but quickly closed the gap (b). However, prices could maintain momentum and moved lower, using the EMAs are support. They rose again before lunch, but had a hard time moving beyond Friday's close. They dropped twice after lunch (d and e) but rallied into the close on rising volume (f).

The Yield Curve and Recessions

There were a few articles on the yield curve over the week -- one in the WSJ and one in Barron's. So I thought this would be a good time to look at the last 30 years of yield curves and recessions/recoveries. In the charts below, the blue line is the 2-year constantly maturing Treasury and the red line is the 10-year constantly maturing Treasury.


Before the 1980s recession, the yield curve inverted (the blue line is above the red line, signaling short-term rates are above long-term rates). After the recessions the yield curve widened, but then inverted about a year before the early 1990s recession.





After the 1990s, the yield curve widened out, but then tightened at the end of the decade. Also remember that at some time in the late 1990s the Treasury discontinued the 30-year bond.


On this chart, we again see the inversion prior to the recession, a post-recession widening out and a pre-recession inversion. Currently rates -- while tightening -- are still very wide.

Critics will argue that the Fed's current interest rate policy is distorting the curve. What they fail to consider is the Fed always distorts policy at the beginning of an expansion -- that's one of the primary causes of the interest rate spread widening at the beginning of an expansion. The other is traders selling the long-end of the curve as they move from safe assets (Treasury bonds) to riskier assets (stocks and commodities) in the anticipation of an expansion. While we have seen a flight to quality over the last three months which has tightened the yield curve, it is still pretty wide by historical standards.

China Moves Past Japan; Detroit Rebounds

From the Financial Times:

The Chinese economy eclipsed the Japanese economy in size in the second quarter after Japan posted poor economic growth figures for the period, increasing the chances that China will officially overtake Japan as the world’s second-largest economy for the year.

The Japanese economy grew at an annualised, seasonally-adjusted pace of 0.4 per cent in the three months ended June. That was much lower than the revised 4.4 per cent growth rate recorded for the first quarter and well below the 2.3 per cent expected by economists.

I was at a conference/convention a few years ago on an economic panel where a presenter made the observation that China was the growth story of the 21st Century. Turns out they were right.

From the NY Times:

After a dismal period of huge losses and deep cuts that culminated in the Obama administration’s bailout of General Motors and Chrysler, the gloom over the American auto industry is starting to lift.

Jobs are growing. Factory workers are anticipating their first healthy profit-sharing checks in years. Sales are rebounding, with the Commerce Department reporting Friday that automobiles were a bright spot in July’s mostly disappointing retail sales.

The nascent comeback is far from a finished product. Foreign competitors are leaner and stronger, accounting for more than half of all car sales in this country. The sputtering economic rebound is spooking investors and consumers alike, threatening to derail some of Detroit’s gains. And talks next year on a new contract with the United Automobile Workers could revive old hostilities.

Still, the improving mood here reflects real changes in how Detroit is doing business — and a growing sense that the changes are turning the Big Three around, according to industry executives and analysts tracking the recovery.

Ford made more money in the first six months of this year than in the previous five years combined. G.M. is profitable and preparing for one of the biggest public stock offerings in American history. Even Chrysler, the automaker thought least likely to survive the recession, is hiring new workers.

This will turn out to be a very successful government intervention in the long run, largely because it is already bearing fruit.

Real retail sales and jobs - updated to August 2010

- by New Deal democrat

First of all, my apologies to readers. I wasn't able to get to the longer piece I had hoped to write over the weekend. In the meantime, since both retail sales and CPI were reported on Friday, let's take an updated look at what real retail sales, which almost a year ago I called the "Holy Grail" of leading indicators for jobs.

In the graphs below, real retail sales are in blue, nonfarm payrolls in red, and private sector payrolls - to eliminate the census jobs - in green. With the disappointing job numbers of the last 3 months, are my graphs busted?

Here's the raw numbers, normed so that December 2007 = 100 (so I can show all three together):


and here is their year over year percentage change:


Nope.

Yesterday's Market

Let's start with a few macro observations. First, the market has been bouncing between two Fibonacci levels this year. Corey over at Afraid to Trade pointed this out a little bit ago, but it bears repeating.


Second, notice we either have a failed head and shoulders pattern or a complex head and shoulders pattern developing. Third, the 104-106 area is providing incredibly important technical support for the market this year. Right now prices are a little under 2% over 106 right now, so we're approaching important technical support levels.



While I've noted the rise in the Treasury market, above is a chart of the junk bond and investment grade bond ETFs. Notice that both are rallying along with the Treasury market. Ideally, the investment grade bond should rise more or less with the Treasuries; the investment grade bond is a good credit risk, although with a bit more risk than the Treasuries. But if the Treasury market is signaling a slowing economy, the junk bond ETF should be falling, as a slowing economy would increase the risk of poor credits.



Last week, the SPYs moved through important resistance on Wednesday (a) with a gap lower (b). They continued lower on Wednesday morning, then moved slightly lower Wednesday afternoon. On Thursday morning, prices gapped lower again, but then rose and spent the rest of the week in a consolidation pattern (d).



In contrast to the stock market, the IEFs (the 7-10 years Treasury market) had a good week. Prices consolidated at the beginning of the week (a) and then rallied on the Fed's announcement to move into quantitative easing (b). Prices then gapped higher on Wednesday (c), consolidated for the next day and half (d) and then had a slight upward move on Friday (e).


Finally, notice the dollar has reversed. Prices have moved through downside resistance (a), money has moved into the security (b and c) and momentum has given a buy sign (d).