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Treasuries more "defensive" than stocks... for now

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The markets have been chewing on a lot of economic data releases this morning, and for the most part, one would have to look long and hard to find many positive signs in the data.

One positive "spin" from today's somewhat inflationary PPI data is that the thoughts of deflation are being put to rest as prices at the producer level jumped in January.

The "flip side" of this spinning coin argument is economic bears questioning whether or not the rise in price at the production level can be passed along to the consumer, which has shown weakening consumer confidence in recent months.

A key level of near-term support at the 7,900 level looks to be tested today in the Dow Industrials (INDU) 7,905 -1.19%. The last couple of days we've noted a "support zone" from the 7,902- 7,925 level in the Dow. Earlier in the week, this was viewed as a resistance zone until the Blix report to the U.N. fueled a bullish market response. Should the Dow fall back below this zone of support, near-term downside looks to be the WEEKLY pivot of 7,841.

Another near-term level of support in the S&P 500 Index (SPX.X) 837 -0.86% is in play at the 836 level. A break below this point leaves the SPX vulnerable to its WEEKLY pivot of 828.

As the session progresses, stocks continue to edge lower. The Treasury bond market has seemed to have an entirely different and more "cautious" response from today's economic data in that selling before the economic data was released, quickly turned into buying and has been rather steady as the session has progressed.

We've been monitoring the 10-year YIELD ($TNX.X) 3.846% which has dropped below the upward trending YIELD support trend that had been creating a wedge in this bond's YIELD chart. While the YEILD action alerted us to potential equity weakness on Tuesday, today's break below upward trend has me observing further bullishness toward this bond's relatively low YIELD. This type of market response DESPITE inflationary data from this morning's PPI data is further sign to me that the MARKET is taking a very defensive approach to things.

The MARKET determines bond YIELDS, but the FED determines interest rates. Under more "inflationary" times, the Fed tends to raise interest rates in order to cool off any inflation. This type of action would be seen as being BEARISH for bonds. Yet bonds find buyers today. While today's PPI report would be the first sign of inflation, and perhaps hint of some type of Fed tightening, the MARKET seems to be seeking out the safety of Treasuries today. This to me is a risk/reward assessment between bonds and stocks, which has the MARKET seeming to feel that while there may be a risk of interest rate increases, those risks may not be as high as the perception of risk for equities right now.

While I say this as it relates to today's trading, I'm not seeing any large swings in the Fed funds futures. March Fed Fund Futures (ff03h) 98.775 are basically unchanged, and has the market looking at a Fed funds rate of (100-98.775= 1.225) 1.225%, which is very close to the current Fed Funds rate of 1.25%.

The gold market is also rather calm today, though higher. The April Gold Futures contract (gc03j) 354.40 +1.22% is up $4.30, but not surging higher at this point. While the PPI number does see some bullishness in gold futures today, it is not overly bullish.

Between gold futures and Fed Fund futures, the MARKET doesn't necessarily seem to be thinking "Fed rate hikes" at this point. This could also confirm some bond trader's actions in the bond market as they are willing to buy Treasuries again today. However, the action in bonds could leave stock out in the cold in coming sessions.

Jeff Bailey

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