Immediately following the terrorist attacks on the Pentagon and World Trade Center towers, one of our focuses was to be monitoring the Swiss Franc futures (sf01z) and monitor this currency vs. the U.S. dollar. Our analysis was that a rising Swiss Franc would give us some important insight as it relates to market psychology.
Today's break below the $0.6058 level on the December, 2001 Swiss Franc futures is not the second level of retracement that gives further hint of a calming market psychology.
Swiss Franc Futures vs. US$ Chart - last seven months
I would consider today's break back below our 61.8% retracement level as bullish toward market psychology. We will note that this contract was trading near 50% retracement of $0.59 just prior to the terrorist attack, but moved sharply higher immediately following the attacks and then for approximately 7 trading sessions thereafter.
What I believe this helps us do is now begin looking at the technicals of the MARKET based more on economics than "fears" of terrorism. If it was my belief that a stronger Swiss Franc would be hint of concern toward terrorism in my trading scenario, then by default I must believe that a weaker Swiss Franc would hint that the MARKET is becoming "less concerned" about terrorism and now begins focusing on the underlying economics of the economy going forward.
Why is this important?
To me, the Swiss France/US$ relationship is important if I am going to understand bond YIELDS going forward. When markets began trading immediately following the terrorist attack, we saw the MARKET sell US$ and buy Swiss Franc. We also witnessed selling in the 30-year Treasury ($TYX.X) as money "wanted out" of the U.S. The selling in the Treasury Market then "destroyed" my previous scenario of a higher YIELD being good for stocks. You see, I didn't know there would be terrorists attacks on the Pentagon and World Trade Center towers.
Now, with the Swiss Franc futures falling once again vs. the U.S. dollar, I can resume my prior trading scenario of a HIGHER bond YIELD being good for stocks as I begin to think the MARKET is beginning to return to a level of "comfort" as prior to the terrorist attacks.
30-year YIELD Chart - last 7 months
We can now begin to look at the 30-year YIELD and benchmark back to levels just prior to the terrorist attacks. Notice how we're almost right back at the same level (slightly under) just prior to the September 11th attacks. Notice how the jump higher in YIELD immediately following the attacks had many investors dumping their U.S. Govt. bonds (the market usually sell perceived risk), but when YIELD reached a point where perceived risk was less than perceived reward (38.2% retracement of 5.635% YIELD) money came back into the long bond and started buying.
As the Swiss Franc (sf01z) falls vs. the US$, we now want to be looking for 30-year YIELD action to help us establish our original trading scenario. The terrorist attacks "threw us a curve" so to speak as we had not planned for such an event. Now that it looks like the MARKET is becoming more rational, we can begin to trade our old scenario of "HIGHER YIELD being bullish for stocks." All we have to do is monitor things from here at 5.346%.
I still feel it is necessary for the 30-year YIELD to get back above the 5.475% YIELD level to give indication that the market is beginning to loosen its grip on the 30-year YIELD and perhaps start rotating some money toward stocks to provide the bullishness needed for a prolonged bull market.