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October 15, 2009

Bond Watch

The big news of the day is not the recovery made by equities nor even the slippage in precious metals prices. The big news is the 3% rise in the price of crude oil. At $78, oil is now 30% higher than the summer correction low and 120% above the crash low. The breakout from the consolidation pattern highlighted yesterday is in full force. It's going to be very difficult for a solid economic expansion to be built on high energy prices. The question for traders is at what point does high energy start dragging us down again? And it's not just energy. How does the construction industry get stimulated by high copper prices? How does the U.S. grow its savings rate if (when) food prices skyrocket? The Fed has put us in the untenable position that the beginnings of any economic expansion will immediately cannabalize itself via inflation.

Before I devolve into a full rant, let's veer back to the markets. Precious metals took a couple of left hooks today with gold down 1% and silver down nearly 3%, both forming daily swing highs. A correction in PMs would be welcome as I have yet to re-apply leverage to the Docfolio. However, the DX will likely have to regain the 76 pivot for an extended correction to ensue, and at the moment that seems like a tall order. Nevertheless, it is best to exercise patience and enter new positions only when one sees a competitive advantage in doing so. Whether it occurs now or in a few weeks, I still expect a corrective rally to form in the DX, after which the dollar bear will resume in force, sending precious metals skyward. I intend to lever myself ahead of such a move, even if it occurs at higher prices than seen today. My current positions will carry me in the interim.

The bulk of the strength in the SPX today can be attributed to the energy sector, as attested by the 2% rises in energy ETFs and the fact that the NDX and small cap indexes were down. In fact, the NDX has been lagging recently... usually a sign of an impending correction... and I will be very curious to see how stocks open next week, post opex.

Okay, one chart and I'm outta here.

treasury price chart

The 30-year is on the verge of breaking the trend line that has defined its consolidative rally. There is a similar formation in the 10-year yield. A break lower could accelerate and spike yields... not good new for the stock market. Could such a break occur on Monday? Hmmm.


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