Option Investor
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Now it starts to make sense!

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Last year when I came to work at the Premier Investor Network, many subscribers were shocked and confused to see some market technician jabbering about bond YIELDS and how important they were in trading. There was a "raucous" among some subscribers that felt bond YIELDS should be falling when the Fed was cutting rates, but we quickly came up to speed when the realization hit that bond YIELDS have less to do with current Fed rate cuts, but have EVERYTHING to do with a market looking forward and perhaps the fortunes of stocks in the futures. Many have been "brain washed" into thinking that when the Fed cuts rates, it is good for stocks. I say "when the Fed cuts rates, it can have a good effect on stocks in the future, but during a Fed easing it is often times most painful for bulls." Here's how I came up with this "knowledge." Lets go back and look at the 10-year YIELD and what took place back in late 1998 and early 1999. That's when the Fed was aggressively cutting interest rates. Isn't it amazing. On November 17, 1998 the Fed cut the discount rate .25 points to 4.5% and cut Fed Funds .25 to 4.75% (had already cut rates several times before). Then on the next Fed meeting on May 18, 1999 the Fed did not move on interest rates as the economy appeared to be in recovery mode from the "Asian Flu." Then on June 30, 1999 the Fed began raising rates and raised the Fed Funds rate .25 to 5%. Isn't that exactly what the YIELD action told us was going to take place when it bottomed on the chart below and then broke above its 200-day MA? I think it did then and I think it does today!

10-year YIELD Chart - From August 1998 - June 1999.

Today, I think we are at a point somewhere similar to that period of late February 1999. I'll disagree with those that say "are you an idiot? We don't want YIELDS to rise as then bonds become attractive and investors sell stocks to buy bonds." I will preface my disagreement by saying that it depends on what part of the economic cycle you are in. Does anyone reading this think that last month was the end of an economic cycle. Sure, there will be bears that say, "Son, you've just started to see the beginning of a bear market." Well, if that's the case, then I think the MARKET is wrong for selling bonds here and causing YIELD to rise. Why would the MARKET be selling the worlds most secure bond? Either we are on the cusp of economic recovery, or we are headed for the worst round of stagflation ever seen.

Jeff Bailey
Senior Market Technician

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