07/01/11 Market Action and Interest Rates

Overall this was quite a powerful week to the upside. After the SPY broke the 130 level it surged higher, and well beyond what I thought was possible. It broke past the 50 day moving average (see figure 1). I would not be surprised to see a correction through price or time next week. It will be important to see if spy can hold the 132 level (stay above the 50 DMA). That would provide more evidence that the buyers have regained control.

The TBF also showed some interesting action this week. The TBF is an ETF that provides a way to short 20 year US Treasuries (See figure 2).  As you can see from the six month daily chart below it has been a downtrend for months, but it made quite a significant move higher last week. My interest in the TBF is more from a fundamental level rather than being from a technical chart perspective. The Fed has kept interest rates at historic low levels for quite some time. QE2 has played a role in that, but now that QE2 is ending, who is going to fill the gap the Fed was purchasing?  Perhaps foreigners (China and Japan, etc...) will step up as buyers, or the Fed will come back with QE3 (but probably refer to it by a different name). If the foreign central banks do not show interest in our treasuries than one would think in order for US treasuries to be more attractive to buyers interest rates would have to move up, thus the price of US treasuries would fall and the TBF would move up.

The TBF still looks questionable from a technical perspective. The major trend is still down, but I am going to keep an eye on it and see if it presents a low risk entry that I am comfortable with, and right now I do not see a low risk entry especially after a huge up week like last week.

Figure 1


Figure 2