by Gregory Brown
Fundamentals Trump Technical Analysis
2/5/2010
Feb 5, 2010
Thursday Feb. 4 was a great example of market fundamentals trumping technical analysis. This is something I have seen consistently over my trading career and believe will always be the case.
After a big move down Wednesday, even the bond bulls were having trouble making their case. One widely read commentary suggested that at the very least bonds would be under pressure during the day, testing lower support levels, with the hope that there would be a bounce in the afternoon going into Friday’s employment numbers. However, no one could predict the fundamental economic realities that kicked in Wednesday night. Serious financial problems in Europe finally came to a point that the markets could no longer ignore. I believe the ‘straw that broke the camel’s back’ was Spain trying to sell 500 million in Euro bonds, but could only muster up enough buyers to take approximately 300 million and had to drop the entire issuance.
Some will argue that technically the bonds reached a point that was a buy signal because it reached a divergence point or other type of signal. Fair enough, but there can be no denying it was the fundamentals that turn the market on a dime and recovered ALL of Wednesday’s sharp selloff, plus more today (Friday).
The UK Telegraph wrote:
“Spain has suspended an auction of sovereign bonds as investors take fright over the country's property crash and accelerating slide into economic crisis.
The treasury pulled an expected sale of 15-year bonds after probing the market informally, saying it would wait until credit conditions began to calm down. "We are not facing financing problems. We placed a successful three-year note on Wednesday," said a spokesman.”
You can get more details from other news sources, but in short the point is that as much as you might like, use and trust your technical signals, don’t ignore what is going on fundamentally. In today’s financial world, this especially means on a global scale.
Check in next week for a very important follow-up point I want to make concerning the financial situation playing out in Europe and the US.
Gregory Brown
gbrown@pfgbest.com
1-800-785-6506
1-312-775-3509
Gregory Brown
PFGBEST Research Team
gbrown@pfgbest.com
Unprecedented Times
2/3/2010
Feb 3, 2010
Sticking to my initial "big picture" thoughts on the interest rate markets, one reality that has hit home with me as a trader is that these are unprecedented times, and leaning on any past normalcy can be very dangerous.
Never before have short term interest rates been set this low by the Federal Reserve Bank. The 0% - .25% rate affects the entire yield curve. Seasoned traders confront price moves that at first light make no sense. It’s easy to get caught off guard because the fundamental patterns and relationships that played out in the past are not happening. Many times the exact opposite is happening.
In particular, the 2 Yr Notes and 5 Yr Notes can trade in a whole different world that is disconnected from what interest rates are doing in the 5 Yr to 30 Yr range. At about .70%, yields on 2 Yr Notes are barely higher than the Fed Funds rate. That yield will not stray far as long as the Fed is on hold. The 5 Yr yield moves up to about 2.25%. But the curve then steepens to the point where there is significant yield pick-up moving out to 10 years and beyond. The 30 Yr Treasury currently yields about 4.60%. This is where the day to day change in sentiment is played out. Price swings can be significant. Price moves up or down seem way overdone and out of proportion to what a normal curve move would be historically.
Bottom line: be sensitive to these situations when you see, or even sense, that they are starting to happen. Why is one Note trading so firm while the rest are getting sold aggressively? Why is the bond contract not moving while the Notes are making significant signals on market direction? A worst case scenario is a spread where you are long one part of the curve and short another starts to lose on both sides!
If so, it’s probably a good time to sit back and watch until things make more sense.
Gregory Brown
gbrown@pfgbest.com
1-800-785-6506
1-312-775-3509
Gregory Brown
PFGBEST Research Team
gbrown@pfgbest.com
Introducing Gregory Brown
1/29/2010
PFG would like to introduce a new member of our research team:
Gregory Brown
Senior Futures and Options Trader
PFGBEST Research
Phone: 800-785-6506
e-mail: gbrown@pfgbest.com
Gregory Brown is a Senior Futures and Options Trader at PFGBEST Research.
Gregory received a MBA degree in Finance from the University of Chicago in 1984. He then began his career on Wall Street with a primary dealer in stocks and bonds. In 1987 he was transferred to work on the floor of the Chicago Board of Trade trading futures for the firm, and later for his own account.
In his trading experience spanning more than two decades, Gregory has most recently performed the advanced inter-day trading of arbitrage in both stocks and stock options and interest rate cash:interest rate futures. Advanced knowledge of option contracts is an important added tool, and sets Greg apart from most commodity market traders. His long career allows him to spot unique trading opportunities as they present themselves, and relay these ideas to his customers.
With experience trading on and off the floor both in Chicago and New York, Greg has developed solid expertise about economic fundamentals such as the impact of Fed rate changes, the cause and effect of volatility, currency fluctuations, and the constantly-changing relationships between multiple cash and derivative markets. He is also a skilled technical analyst. Greg participates in many PFGBEST educational webinars (these are archived and can be viewed at www.pfgbest.com) and is a published author, having written for SFO magazine on the subject of interest rate yield curves.
To further round out his experience, Gregory used his expertise in a corporate setting. At three separate international companies, he managed foreign exchange and interest rate hedging and risk management exposure. His market knowledge helped his co-managers minimize risks faced by their specialized treasury departments working with large sums.
INITIAL THOUGHTS
As a beginning to writing this report on the interest rate markets, I’ll just start by making some "big picture" comments.
If you are a trader, always remember you are trading Interest Rates and not prices. This sounds pretty obvious on the surface. But traders, especially those of us who are rather short-term in nature, have to focus on the prices we buy and sell as the market makes its moves up and down. Electronic trading platforms focus on doing technical analysis on these prices. But the prices are only derivative of the interest rate. This applies even for futures, since these contracts are still settled with Treasury securities and not in cash.
As an example, if the 10yr Note interest rate has made a significant move up (prices moving down), it may reach levels that start to look attractive to fixed income investors. Remember, there are Mutual Funds and other institutions that are dedicated to holding just fixed income securities. They represent billions and billions of dollars that need to be invested. After a big move down, a price chart might look very bearish. But a trader should be aware that they are trading interest rates, and interest rate levels would be sending the exact opposite signal.
One last observation has to do with the yield curve. It is often quoted in an interest rate spread between the 2yr Note and 10yr Notes. But I consider this outdated, since it ignores the importance of historical Federal Reserve short term rates of 0% to .25%, and the fact that after a hiatis, the Treasury has gone back to issuing 30yr securities on a regular basis. My future comments will touch on this.
I hope you will visit this site often. I will strive to always have some unique insight into the current interest rate markets, or market environment in general, that will aid all market participants.
Gregory Brown
gbrown@pfgbest.com
1-800-785-6506
1-312-857-2524
Gregory Brown
PFGBEST Research Team
gbrown@pfgbest.com
There is a substantial risk of loss in trading futures and options.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
