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Market Comment
Thrashing Markets

Bob Hoye
Institutional Advisors
Posted Jun 28, 2011

“Treasury bond yields dive again; some T-bill buyers said to take less than zero” -L.A. Times, June 23

  • We have been looking for a good rebound for the S&P out of the Springboard Pattern. A couple of firm days does not fulfill this.

  • However, some alerts have appeared.

  • Yesterday, the US Treasury bill was briefly negative. Despite hundreds of years of contrary evidence, the establishment still believes that declining short rates can revive financial markets and the economy.

  • Bill rates started their fateful decline in April 1929. This is Mother Nature's joke on interventionist economists laying the blame for that Great Depression upon the Fed raising the discount rate from 5% to 6% that August.

  • The charts (below) show the plunges in the bill rate in 2008 and recent.

  • As noted in Thursday's Quick Pivot, an increase in the gold/silver ratio would be an alert.

  • Very low Treasury bill rates have not been a result of Fed policy but mainly due to liquidity concerns. In times of concern conservative money goes to the most liquid items. Usually treasury bills or the equivalent in the senior currency, which is still the US dollar.

  • The other most liquid item is gold and in times of concern gold rises relative to most other investments and commodities--including silver.

  • Which explains the consistent behaviour of the gold/silver ratio through a financial mania and consequent contraction.

  • This week's action indicates the post-bubble contraction prevails.

The equity markets have been vacillating in a 3% range for two weeks. This follows oversold ‘Springboard’ readings emanating from six consecutive weeks of downside closes. The rebound in the S&P has been capped at the 20-day moving average, although the 20-day Bollinger Band (currently 1330) offers the best resistance.

In our report of June 20th we presented the charts of daily market action following weekly Springboard alerts. Instances that failed to advance to the Bollinger band on the first rally saw a test of support or a secondary low. By measuring the height of the consolidation (on a closing basis) you can see that in 2006 and 2004 it declined by an amount equal to the height of the consolidation. This provides a target support at 1235. A 38% Fibonacci retracement from the July lows also presents support at 1233.

(Click on images to enlarge)

From a credit perspective, the decline in T-Bill rates on an intraday basis below zero on Thursday brings back memories of a similar rush to T-Bills in the spring and fall of 2008.

The gold/silver ratio bottomed with the top in equities at the end of April. A move above 45 would be an indication that credit is tightening and another ‘All One Market’ liquidation event could be in the making.


Jun 24, 2011
Institutional Advisors

Hoye Archives

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