Any time a change whether perceived or real in either supply or demand is added to the “formula” an imbalance occurs. That imbalance is what “fundamentally” moves markets. Of course the “ball” is then picked up by the technicians who proceed to exacerbate the particular direction by adding an inordinate volume of trades on one side or the other. Contrarian traders tend to watch for such extremes and attempt to take advantage of them on a trading basis. How to identify extremes is a complicated procedure that weighs all the “evidence” as exemplified by current “known” data and directional momentum, adding probabilities, and making an educated determination of the next potential directional move. One major factor, which has emerged of late, is the impact of the U.S. Federal Reserve on all aspects of “human life” on the planet. If in fact the direction of a futures contract is determined by the underlying cash price for a commodity, and the direction of the cash price of that commodity is determined by the interest rate, it makes no sense to me to chart the futures contract. It would make more sense to chart the direction of the rate. In other words, the “tail does not wag the dog”. Since at this moment in time and for the foreseeable future, the action of the Federal Reserve will determine the direction of rates as dictated by the condition of the economy. The direction of the U.S. as the most “prominent consuming nation” in the world, also determines the economic activity of our trading partners. Currently markets are directed to some extent to the ongoing debt crisis in Europe and the real possibility of a breakup of the Eurozone currency.
In recognizing the role the Federal Reserve plays in the overall picture of international industrial and economic “health”, one must try to analyze the probability of their next action. The impact of their actions on the U.S. dollar for instance, determines the competitiveness of U.S. products in the world “marketplace”. Consequently their actions determine the earnings and spending capabilities of its citizenry, the people who buy products such as automobiles, appliances, hardware and everything else that is either manufactured domestically or imported and comprises the trade balance. Current improvements in the “trade deficit” figures, in my opinion, do not reflect an improvement in trade but rather a decline in overall activity. Percentages, I would offer, do not change with declines in overall activity so the reported trade deficit figures tend to incorrectly define such activity. Now for some actual information and a reminder that I am accepting client accounts under my personal direction or management.
June Treasury bonds closed at 141 31/32nds down 8/32nds as money made the “trip” back to equities on Friday. Traders took profits after recent gains in anticipation of next Federal Open Market Committee meeting. We have recently suggested a trading range between 135 and 145 and as we are approaching the higher end of the range we would look to sell futures or calls if the market posts additional gains. As prices moved higher yields declined. The yield on the 30 year bonds settled at 3.128%, which, due to the light selling in bond futures, was up 0.019%. We continue to view the bond market as a trading affair.