In a recent piece in this space, the concept of the ascendance of gold and the gradual ever-weakening of the American dollar was discussed. But, upon reading it over a few times, there was definitely a component left out. Namely, the performance of the dominant U.S. Treasury bond- the 10 year bond. For many years, the 30-year bond was the most widely followed and traded, but in recent years as the amount of U.S. debt has continued to skyrocket, investors have shortened their time horizons thus the 10-year has become the king. Historically, as the dollar weakened and gold strengthened, the bond weakened also. This of course makes logical sense (rare in this business!) because if more dollars are out there and gold prices are rising, the signal would be inflation which would imply that interest rates would have to increase as well. However, this really has not been the case in the last three years or so. The positive effect taken from all of this is that as interest rates remain low, it makes American asset prices that much more attractive to foreigners thus yet one more reason why we've had such a wonderful bull market in 2009. Furthermore, most people don't truly understand how bonds have defied logic except that as discussed in previous blogs, it is in the best interest of the American and Chinese governments to keep rates low. The American government needs to finance its debt as cheaply as possible and the Chinese government owns a tremendous amount of U.S. debt securities thus it is in their best interest to keep the asset price steady. However, all of this leads to a bit of a more sinister long-term overtone. First, one cannot maintain an artificial market in perpetuity (if indeed the effect of the Chinese and American government buying is what is keeping bond prices so strong). But second, the alternative in the long-run is not good either: namely, it is a flock to safety. Many fund managers and investors are now inherently risk-averse so the message from the markets is that there is indeed a lot of risk out there. For day traders, all we can do is intensely monitor bond prices more than ever before. In the immediate-term, bond yields actually continue to fall which seems contrary to what the obvious would dictate unless there is something else out there that the common layman (read:me) cannot see on the horizon as yet. If the gold-dollar move gets out of control, it is highly likely that bond prices will become every bit as volatile which will drastically increase volatility in equity prices as well- certainly something to keep an eye out for in the coming weeks to months.
Markets in Asia were weak overnight with the Nikkei losing its grasp on 10000 by falling 1.5%. In Europe, the bourses are down about ½% on average. The dollar is up slightly as are bonds while gold and oil are giving back a little of their enormous gains yesterday (oil up about 6%; gold up 1.5% yesterday). Futures are notably weaker ahead of the jobs report tomorrow. For today, look for a choppy session much less yesterday albeit with less volatility overall as it quiets down ahead of that major economic news tomorrow. Trading will likely be to the downside from the get-go but if there is no “oomph” on the initial giveback, there will likely be a weak low volume short covering rally. Overall, look for a mild down day overall with a focus on microcap stocks and more importantly, capital preservation as the news flow is light right now...it is October and earnings season is approaching so the opportunities will come very soon.
Watch list:
10012009Eriklist.zip
Reiterating-
Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea.
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
LWSN- good earnings
CPRX- continuing development of CPP-109 for cocaine and methamphetamine addiction based on positive phase II data
BAC- announced CEO Lewis is stepping down; the vulnerable CEO’s resignation/retirement is viewed as a mild positive as Lewis has been under fire for bonuses paid to Merrill Lynch employees among other things
SYNA, LEAP- featured on “Fast Money” last night
BCRX- commencing two lat stage studies for its flu product
XRTX- good earnings
DFT, NVDA- featured on “Mad Money” last night
VICL- announced U.S. Navy has awarded a $1.25 million contract to support company’s H1N1 flu vaccine
STZ- decent earnings
TLCR- IPO pricing 50 million shares @ 19
CHTP- according to company, additional analysis of Droxidopa confirmed “significant” benefit in treatment of neurogenic orthostatic hypotension
TER- raised earnings guidance
AAPL- target raised to 210 at Oppenheimer
Bad-The following stocks have bad news and/or a weak technical pattern
PAG- pulled out of a deal to buy GM’s Saturn brand
UAUA- share offering
ASTI- share offering
HOKU- island reversal after positive fundraising news
CIT- closed near a low as it teeters on the precipice of bankruptcy
VSR- closed sharply ahead yesterday, but near a low after announcing it won an Air Force contract
ABAT announced a $19 million share offering
Earnings:
THURS OCT 1 BEFORE
MXB STZ
THURS OCT 1 AFTER
ACN BLUD GPN
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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