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Bond bulls are back, but stocks hold tough

HAVING TROUBLE PRINTING?
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I sure would have thought that further buying in Treasuries would have stocks suffering greater downside consequences than what today's action depicts as Treasuries continue to find renewed buying after today's economic data continues to show a rather lackluster economic growth picture.

The major indexes have been hovering near unchanged levels ever since the Chicago PMI showed contraction with a reading of 45.9%, which was below September's reading of 48.1% and weaker than economist's forecast of 48.7%. Readings below 50% are considered to show economic activity contracting, while readings above 50% depict expansion.

The weaker than forecasted GDP data, along with the weak regional Chicago PMI data has money once again flowing into Treasury bonds. The very short-term 13-week Treasury, which many short- term money markets and saving account interest rates are tied to has its YIELD falling to a new multi-year low with YIELD dropping to 1.412%.

Also seeing bullish price action are the 2, 5, 10 and 30-year Treasury futures, with the benchmark 10-year futures (ty02z) 114'225 +0.28% breaking above yesterday's range and looking to challenge recent highs set in mid-October of 116'000.

I'd currently have to assume that the bullish action in bonds, that should be starving stocks of cash is in front of next week's FOMC meeting.

It has been reported that while bears look hungry, many are afraid to be shorting equities and still looking to unwind some bearish trades as it is uncertain how the market will respond to the Fed's predicted 25-basis point cut, and speculated 50-basis point cut. Again, current Fed Funds Futures (ff02z) are trading 98.61, which has the MARKET firmly expecting a 25-basis, but when now calculating (100-98.61 = 1.39%) the difference between Fed Funds futures and base value 100, we're seeing the futures contract now getting even closer to the 1.25% level. Current FOMC policy has Fed Funds at 1.75%.

I would suggest that bears currently holding Index puts and equity puts on WEAK stocks relative to the broader S&P 500 Index (SPX.X), continue to HOLD those puts as long as the trader/investor has NOT over leveraged in the trade and is comfortable in doing so.

While I (Jeff Bailey) am NOT an economist, I tend to agree with those economists that state that the current weak economic numbers are not necessarily because of a tight money supply or liquidity issue, but more of a "psychological" factor and recent drop-offs in consumer confidence.

For now, I feel that we would most likely find a "sell the news" type of scenario once the Fed makes their decision next week.

Sector action remains rather mixed with the Dow Jones US Home Construction Index (DJUSBH) 310 +2.23% trading higher, most likely on the decline in YIELDS in the 10-year and 30-year Treasuries, which will impact mortgage rates near-term. Also strong today is Wireless (YLS.X) 46.80 +2.36% and Airlines (XAL.X) 37.80 +2.55%.

One area that has me thinking we could see some type of "sell the news" scenario after next week's FOMC meeting is slight weakness today in the financial sectors. I would have thought a cutting of rates near-term would potentially help stimulate some loan activity for financials, which tend to outperform in a more accommodative Fed environment, but these groups don't seem to be benefiting as some technology sectors are today.

Here too, while I can't quantitatively say this is true, I feel the financials were perhaps not as heavily shorted as many technology sectors and perhaps not seeing as much jittery bear buying ahead of the FOMC meeting.

Volume is just about average with both the NYSE and NASDAQ volumes running just under the 1 billion mark.

Breadth is slightly positive with the NYSE showing 17 advancers versus 13 decliners, while NASDAQ breadth is showing more even breadth with 15 advancers for every 14 decliners.

New highs versus new lows remains rather bullish. The NYSE has 31 stocks trading new 52-week highs versus 36 stocks at new lows, while NASDAQ remains rather impressive with 38 stocks hitting new highs versus 31 stocks at new lows.

Jeff Bailey

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