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Market gets defensive after Greenspan speech

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Treasury bonds are rallying (bond YIELDS falling) and stocks are trading lower after Federal Reserve Chairman Alan Greenspan said that there were significant risks in the near-term, while there were signs that the economy was beginning to show signs of a recovery.

Yesterday we did see some buying in bonds as YIELDS dipped lower and today we've seen a sharp move lower in bond YIELDS that has me believing the MARKET is very defensive. The 5-year YIELD ($FVX.X) fell sharply, indicating an aggressive amount of buying in this shorter-term bond.

5-year YIELD Chart

Yesterday we became more "defensive" toward the broader-market stock indices as we were seeing some meaningful buying in the Treasury bond market. The 5-year YIELD as you can see has moved sharply lower today to 4.067%. In the past, it has been our observation that the buying in Treasuries seems to "starve" the stock market of cash that is needed to help drive stock prices higher. We will note that the 5-year YIELD has fallen right to a level of retracement that could serve as near-term YIELD support. Any violation tomorrow (bond market closes at 03:00 PM EST) and a move below the recent relative low of 3.935% could put further pressure on stocks.

Many analysts will point to the Mr. Greenspan's speech today as being the cause of the current stock declines. In all, Mr. Greenspan advised caution, but did give some bullish thoughts on the economy showing signs of a recovery. What is important for investors/traders to understand is the MARKET response.

I've often said... "trade what you observe, not what you believe." Every trader/investor should have their stops set firm in trades they hold long. In yesterday's commentary and again this morning I profiled a short trade in the SPDRS (AMEX:SPY) so bulls and bears should be doing OK right now. Stay disciplined and controlled. Trade your plan and stick with what is working and close out what isn't if the stock hits your stop.

Jeff Bailey
Senior Market Technician
Option Investor

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