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Here's an interesting bullish
perspective on the bonds.
<SPAN
class=arial26b>=======================================
Bonds' Crystal Ball: Good Times<SPAN
class=arial12>By Tony CrescenziChief Bond Market
Strategist, Miller Tabak & Co., LLC, and CEO of
Bondtalk.com<SPAN
class=arial10>Dec 12, 2000 11:20 AM
<IMG height=1
src="http://fp.cnbc.com/images.cnbc.com/image/common/orange_line.gif";
width=540>
The stock market ought to borrow the bond market's crystal ball. Fluctuations
in the Treasury market accurately predicted many of the past year's economic
developments, and right now, they're calling for improving growth prospects in
the months ahead.
Investors who heeded the warnings implied by the yield curve - the
relationship of short- and long-term Treasury rates - at the start of the year
now are sitting pretty. Everyone else seems caught in the headlights of a
changing economy.
Before I go on, let me give you a little primer on the yield curve. For
simplicity's sake, I'll speak only in terms of U.S. Treasuries. The yield curve
basically plots the yields of bonds carrying different maturities, usually
ranging from 3 months to 30 years. It looks something like this:
<TABLE align=left border=0 cellPadding=2 cellSpacing=2 width=280 VALIGN="top"
HSPACE="5">
<IMG alt="" border=0 height=150
src="http://fp.cnbc.com/images.cnbc.com/ccimage/001212crescenzi_280x150.gif";
width=280>
Bond investors analyze the difference between yields of short- and
longer-term securities. The spread between the 2-year note and 30-year bond is
one commonly used benchmark. Normally, the longer issue should yield more than
the shorter instrument, producing a positive-sloping yield curve. The reverse
arrangement, which we currently are experiencing, is called an "inverted yield
curve."
The shape of the yield curve can mean a variety of things to bond investors,
but there are two basic ways of looking at it.
First, a positive slope usually indicates the Federal Reserve's monetary
policy stance is and will likely continue to be friendly toward the markets.
Since Fed policy influences short-term rates most strongly, they tend to be low
when Fed rates are falling or being held at a relatively low level.
At the same time, easy Fed policy promises stronger growth and potentially
higher inflation in the months and years ahead, so longer rates tend to rise or
hold steady when the Fed is cutting rates. A steepening yield curve generally
foreshadows good times for stock investors over a several-quarter horizon.
On the other hand, a negatively sloped yield curve usually indicates that Fed
policy is unfriendly, with the Fed raising official interest rates to slow the
economy. This, of course, generally portends a gloomier set of conditions for
the equity market and the economy.
Perhaps investors should have expected the economic growth spurt of the first
half of this year would be followed by a deceleration. Certainly, that's what
the yield curve foretold when it inverted back in January 2000. Many investors
and analysts dismissed the inversion as related to technical factors, such as
Uncle Sam's buyback of the national debt. But there were clearly other reasons
for the inversion that had implications for the markets and the economy.
First of all, the bond market started believing the Fed would have to raise
rates aggressively to slow the economy. That's exactly what happened -- the Fed
raised rates one full percentage point over the next four months. In turn, bond
investors began to believe economic growth would decelerate. It did.
Stock investors took more time to heed the yield curve's message that the Fed
would put its chokehold on the economy - but not much more time. It's probably
no coincidence that the Dow Jones industrial average peaked the same month the
yield curve inverted. The S&P 500 and the Nasdaq peaked just a couple of
months later, in March.
So what is this crystal ball telling us now?
For starters, note that the yield curve became positively sloped (from 2
years to 30 years) for the first time since January just this past Friday.
The return to a positive slop has a few implications for the markets and the
economy. First and foremost, it indicates the markets expect the Fed to start
working toward economic stimulus. Indeed, the bond market is expecting for the
Fed to cut rates as early as the end of January.
Second, the bond market believes the economy will regain its footing again
after a period of weakening.
The rate-cut hope also augurs well for the stock market because lower rates
typically boost economic growth, thereby boosting corporate earnings. Lower
rates, of course, also reduce the competition for capital, as investors flee
lower-yielding interest-rate products and move to stocks, where returns are
usually much higher.
The increased hope for a friendlier Fed is already helping cyclical
companies, including basic materials companies such as Dupont, International
Paper, and Caterpillar. Retailers have also started to gain: Wal-Mart {<A
href="http://www.cnbc.com/stock/dtq.html?sym=WMT";>WMT} and Sears {<A
href="http://www.cnbc.com/stock/dtq.html?sym=S";>S}, for example, have been
grinding upward. All of these companies have one thing in common: hope that the
Fed will cut rates and thereby invigorate the expansion and boost corporate
profits.
If these hopes are fulfilled, we will be able to look back and say that the
yield curve called it. Again.<SPAN
class=arial13>
----- Original Message -----
<BLOCKQUOTE
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px">
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Dan
Harels
To: <A
href="mailto:realtraders@xxxxxxxxxxx";
title=realtraders@xxxxxxxxxxx>realtraders@xxxxxxxxxxx
Sent: Tuesday, December 12, 2000 9:18
AM
Subject: Re: [RT] Re: Boeing crashes and
burns
Thank you for the added perspective Gitanshu. It was
quite useful. Stepping back and looking at the big picture is a
skill that I need to develop. I also need to stop trying to pick
tops and bottoms and fight trends.Thanks
again,Dan>From: "Gitanshu Buch" <<A
href="mailto:onwingsofeagles@xxxxxxxxxxxxx";>onwingsofeagles@xxxxxxxxxxxxx>>Reply-To:
<A
href="mailto:realtraders@xxxxxxxxxxx";>realtraders@xxxxxxxxxxx>To:
<realtraders@xxxxxxxxxxx>>Subject: [RT] Re: Boeing crashes and
burns>Date: Mon, 11 Dec 2000 13:24:32 -0500>>In addition
to Earl's response to Dan I have the following perspectives to>offer on
the pattern:>>I've taken a rather longer term view of the Boeing
cup, see chart.>>Depending on length of congestion (or cup) one
chose, one could use A or B>as the valid breakouts, and C or D as the
matching handle lows.>>Based on this chart the stock doesn't
look damaged goods to me and has only>covered about a third of its
potential move up.>>The short handles (2-3 weekly bar pullbacks)
did violate the absolute>pivots, not a preferred course of textbook
fare.>>The textbook recommends a 7-8% stop loss below the pivot,
so hindsight >tells>us one would not be stopped out in either A
or B trade, and one would still>be long this - presumably with stops
rolled up.>>Oscillators on lesser timeframes (Daily etc) would
have one start looking >to>book profits, since divergences are
getting pronounced with each>rally/pullback/rally sequence. But then
the move is just getting started,>says big
picture.>>Trend following methods would have one stay long and
even pyramid into>additional positions since most pullbacks are
stopping at the 50 day moving>avg, even though the distance between
current price and trend-following>support keeps widening with each
thrust up (and this increases the>volatility of one's p&l
line).>>But these are money-mgt issues specific to the competing
and often opposing>indicators, not pattern issues.>>Given
the length of the longer congestion (2+ years) I would be
very>surprised if BA broke down from here (or at any stage since the
breakout).>>The general rule of thumb is, the longer the
congestion the better the>"stickiness" of the breakout. The corrolary
has to do with the number of>attempts it takes to make the breakout,
the more the attempts to break out,>the lesser its chances of success
in the short term. This is the >predominant>feature I've noticed
in failed breakouts, from INTC to NOK.>>O'Neil also makes the
case in his paper / books about "late stage breakouts>typically fail" -
but if a company has been around for 25 years, and we're>looking at a
breakout in Year 5 or 10 or 15, how can we say this is "late>stage" or
mid stage or the fun is just starting?>>There is, therefore,
considerable latitude to the person visualizing
the>breakout.>>What has happened in the recent past is
that the post-breakout % or $$ move>has all been captured by a very few
bars relative to the time it took to>make the length of the cup -
examples that come to mind are LEH and JPM ->and MRK. So if one wasn't
stalking the stocks and if one didn't have >resting>buy-stops in
place before the breakout, one would reasonably have stood>aside
waiting for the pullback to pivot that never happened.>>In other
cases, the thrust from the handle has been rather slow (eg - PEP,>BUD)
and/or the pullback to pivot has in fact violated the pivot -
leading>one to either abandon the pattern in favor of faster moving
stocks or in>favor of disbelief in the pattern.>>Must be
the nature of the varied popularity of the pattern or the>desperateness
of hot money finding relatively cold blooded momentum, but
>I'm>just guessing.>>I don't know if this pattern
can be made into a scientific cause-effect>relationship since it gets
applied to underlying securities across the>spectrum of fundamental
influences in the stocks/industries that make
the>breakouts.>>Bottomline is that if something is
defying gravity and making it into the>New High list with volume to
back it up, it "should" go up.>>The element of surprise is
therefore in its failure to go up, and should be>allocated "sit up and
take notice" status - and for the early bird, maybe a>fade the breakout
trade.>>It is to be assumed that everybody that trades this
pattern, knows both the>preferred way and the surprised way - and does
something about it. This>probably results in noise at the breakout
pivot level as competing>influences duke it out to create - for
examples - the pullback below pivot>(stops out the purists), the handle
on not falling volume (purists chicken>out), the lack of handle but the
confirmed takeoff (purists never get in) ->and other variants - to
which my response has been to combine underlying>positions with options
to define my risk & time commitment rather than to>widen the stop
loss to accomodate market noise.>>There is also the magnitude of
the daily trading ranges - on a % basis, the>daily trade in a BRCM may
replicate that of BA but the financial impact and>the trading games
people play with both are not really comparable even>though both may
sport the same picture. BRCM may be under-owned, BA may be>over-owned.
BA's chart will act thicker than BRCM. BRCM may fall 50% from>its high
to the depth of the cup, but it is a $140 move while BA falls
>"only>$30" yet it is the same 50% off the $60
high.>>In reading the literature, I believe the pattern was
meant to isolate the>"growth stocks + growth co's" of any new bull leg.
Growth, I believe, was>fundamental, the explosion of consecutive
earnings and revenue numbers >being>mispriced into the market as
the cup formed and then the market reaching >the>point of
recognition where supply supposedly evaporates and demand kicks in>big
time, creating the breakout, and then the follow-through as
demand>consistently crowds out the supply. thus bidding up
prices.>>We the trader have taken the concept and applied it
across the board to>everything that congests and explodes even though
the underlying business>grows 5% a year in a universe meant to isolate
those businesses that grow>125% - usually when nothing in the growth
complex is setting up the picture>but we are very comfortable trading
the picture so we might as well find a>market for our skills. This
mass-scale misuse probably creates its own>impact on the resultant
chart patterns.>>Everything tends to "grow" at some point in the
cycle - recently we had >tons>of utilities and bonds breaking
out, before that the foods & beverages >broke>out, before
which the drugs broke out, all while tech was getting
slammed.>>Meantime, tech continues to sport the best %
consecutive fundamental growth>while everything else is - as they say -
"for a trade".>>If there is a science to this, then it must be
in identifying that group>rotation from the composite of the new highs
that exhibit these patterns ->and extrapolating that identification
into where the stock market is voting>regarding the state of the
current phase of the economic cycle -- possibly>with a six-ten month
future horizon.>>Thus, one would understand that early expansion
companies like home>builders, mortgage finance lenders/consolidators,
most regional banks &>savings/loans, restaurants, and specialty
retailers make up the current>list. Every one of these companies
benefits from a POTENTIAL drop in>interest rates. Meantime, the
recession type stocks drug/food stocks are >in>decline,
coincident with the rise in the Fannie Maes and the Mellons and
>the>Brinkers - this pattern seems to indicate that the market
projects a lack >of>recession a few months out, and the market
would be surprised if this were>otherwise. Just the way history would
have behaved, only the players are>different.>>One would
note that the "growth" phrase is missing from the above - after>all,
who would expect a Fannie Mae to do well when one sees a TV
headline>blaring "Lowes warning of lower sales due to slow down in
housing starts" >or>something like that.>>But for
most of the stocks that make up the non-growth group, these are>better
bought at the bottom of the cup than at the top - of course,>blasphemy
to the breakout buyer and common sense to the value-conscious>buyer -
but the bulk of the %age gains come from the ride up the right side>of
the cup, and not from the subsequent breakout.>>Then there is
the element of churn & psychology. For every JPM or LEH that>took
off, there were 2 and even 3 that didn't. Going into the trade, how
>was>one to "know" that correct pick? Also, if one took each
trade as it came up>and then robotically churned the account due to
frequent stop outs or lack>of brutal takeoffs, where would one find the
psychology to ride the one >that>really took off after some
initial sluggishness?>>Finally, where one gets a 10% up move in
one day, why would one have>patience to ride up 10% in 2
months?>>Are all questions that I thought about along the
various journeys up >CANSLIM>trees.>>It has been a
fascinating bunch of questions that sprung up as the pattern>became
more familiar to me... and at the end of it all, for me it boils
>down>to applying it to what it was meant for and staying in
cash when nothing>that it was meant for sets up, else being aware of
the deviation from the>norm and expecting less perfect responses from
the chart.>>Gitanshu><< BA.gif
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