CTS Spotlight for the week of Sept. 2nd, 2011

Hello and welcome back to CRI's CTS Spotlight,

09/02/11:The US dollar index has held the important low of 73.51 but keep watching that level as dollar bulls aren't quite out of the woods just yet. The Labor Day weekend is finally upon us and with it hopefully too comes the end of the low volume, high volatility sessions we have experienced through the summer of 2011. While no new trends have been established in commodity land this week, several older trends (gold, Swiss franc, bonds) are re-exerting themselves. Is this their final push higher - too early to tell but I for one shall be watching for reversals in the coming weeks. This week's CTS Spotlight blog shall take a good look at the US 10 year Treasury Note to see if we can make some sense of the monster rally of late.

There is so much talk about the bond market of late (European sovereign debt, downgrade of US Treasuries by S&P etc) I thought it only prudent to take a good look at the US Treasury market to understand just what exactly is going on. 

Aside from the political rhetoric and its associated manipulation by the media, US Treasuries are in a resounding bull market. No ifs ands or butts. Politicians would have one believe bonds are in trouble - quite to the contrary, bonds are doing quite well and look to add to those gains in the coming weeks/months ahead. Interest rates are going down, not up. Deflation should be the primary concern - not inflation. And most importantly, the market wants more bonds not less. If President Obama understood this, his economic team would use that market strength to implement a massive public works project. The US Federal Reserve has given a huge endorsement of such a program when it recently suggested that monetary policy should take a back seat to fiscal policy when thinking of ways to get out of the current economic slowdown. Tragically, politicians are very rarely good economists...

Lets take a look at the charts. Just above are the Weekly & Monthly Continuous Futures Charts for US 10 year Treasuries. As any market technician will tell you, 'a chart moving from the lower left to the upper right is a bullish chart' and that is exactly what we have here. Currently we are well contained within a massive monthly upwardly pointing channel where both long term support and resistance are far away from current prices. In fact, bonds bottomed more than five years ago and are just now entering their fourth year of trending higher. The recent breakout through 127.94 confirms this thesis and is yet another sign of strength. Indeed, this bull flag formation suggested price wanted to reach for 131 in the near term [(127.94-114.89)+117.94 = 130.99] and they have done exactly that. Traders & investors who bought the spring '11 bottom (122.47) are enjoying immense profits (up almost 9 points or $9,000 per contract) and would be well advised to let some of that position go upon hitting the bull flag target. Consider too that this huge rally has come in a very short period of time and one gets the feeling this market needs some time to either consolidate sideways or make an outright correction. A 50% retracement of the move higher would bring prices back into the 125 range [(117.94+131.29)/2 = 125.61] but the breakout to even newer highs over the past week suggests there is no top in place yet and prices may move even higher still in the coming weeks/months.

In Summary then, Interest rates have fallen considerably over the past few years as US economic growth has literally ground to a halt. Couple North America's demographic problems with China's need to curb its own inflation worries and Europe's complete lack of leadership amid the Euro's first real economic challenge and we have the makings for a deflationary spiral very similar to Japan's spiral of the 1990's. While politicians and their media counterparts spin a tale of inflation, deflation should be the primary concern going forward. Interestingly, history is giving the US government a window to expand its debt and grow its way out of the problem - will someone have the political courage to lead it through it? the 1990's was called 'the lost decade' in Japan - only time will tell if we shall have to 'lose' a decade too.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com