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Retail sales give bulls further life

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In last night's Index Trader Wrap, I thought today's October retail sales numbers might be the most important economic data to be released that could dictate market action into the end of the year and perhaps the holiday shopping season.

While some of our "test" criteria for a MARKET response that would hint of an extended move higher have yet to be achieved to the upside, there are some bullish signs from the bond market shaping up.

In recent commentary, I've thought equity traders should be monitoring the longer-dated 30-year YIELD ($TYX.X) to see if selling in the "riskiest" bond that offered the higher and more attractive YIELD would portend good things for the markets.

After the Fed cut interest rates 50 basis points last Wednesday, cash flowed alarming quick back toward bonds and drove YIELDS lower across the maturities.

However, today's retail sales numbers did get the attention of bond traders and it appears that the bond market actually liked the numbers and we've seen selling in Treasuries, enough in fact to have the 30-year YIELD reversing up 3 boxes on its point and figure chart. This hints near-term, that supply (selling) is starting to show up on a more meaningful basis and this can bode well for equities.

It has been the bullish equity side of me that feared, just like it has in the past, that money flowing back toward Treasuries would starve equities from the needed cash they so need to drive prices higher.

Today's action in the 30-year YIELD ($TYX.X) with YIELD rising to 4.9% also bodes well for my recently profiled bullish YIELD call play in the 30-year YIELD March 5.0% calls. This trade was profiled just ahead of the FOMC meeting, just in case the Fed decided to not cut rates. Damage control was factored into the trade by profiling enough time (March expiration) to give the MARKET enough time to digest the FOMC decision, whatever it was, but thought was that before March expiration, the 30-year YIELD would be higher as the MARKET began looking at a Fed policy that may not have had too many more rate cuts under its belt and might actually start a policy of tightening, should the economy improve.

Anyhow... stocks are finding some bidders this morning and Treasuries are finding some selling. This gives equity bulls the edge here and still has the 30-year YIELD call an attractive bullish call play, which is actually a BEARISH play on the longer-date Treasuries price.

30-year YIELD Chart - 0.50 box

In last night's Index Trader Wrap, we wanted to monitor the Retail HOLDRS (AMEX:RTH) $74.40 +2.19% to try and judge the MARKET response to this morning's retail sales data. First test of resistance for the RTH would be both the 21-day and 50-day SMA's still above at $75.65, so there's some work to be done to say the MARKET is really responding bullish.

We also want to monitor the bond market as it is perceived as the SMARTEST money when compared to the stock market. It has to be, especially with YIELDS at such historically low levels. Today's response to the retail sales numbers also hints of bullishness toward the equity markets and equity bulls perhaps breath a sigh of relief near-term as the RISKIEST bond, the 30-year Treasury, sees selling and YIELD rise. Enough in fact to the its point and figure chart reversing up 3-boxes and dodging a potential sell signal and break to new lows of 46.00 or 4.6%.

Stock investors will note the downward trend from the March (red 3) and April (red 4) highs, and correlate that to how stocks have performed since that time. In March, the S&P 500 Index (SPX.X) 897.90 +1.75% was trading near 1,100. When money flowed back toward bonds and some of that cash into the riskier 30-year YIELD up at 5.7%, it spelled pending weakness for equities. Conversely, the recent long column of X in the 30-year showed some meaningful selling in the bond, and equities have rebounded from their lows. Today's 3-box reversal higher in YIELD bodes well for equities and hints that money is leaving the riskier 30- year once again. Freeing up some cash that can find it way into corporate bonds, and stocks that offer potentially higher returns.

Jeff Bailey

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