The big story this week is the rise of the ten year bond rate ($TNX) above resistance (both R1, as discussed in class, and now R2). This rate closed Friday at 4.684%, its highest level in more than a year. The main "fuel" for the breakout beyond R2 is a rate hike by the European Central Bank, a higher-than-expected inflation reading in Japan, implying they will begin raising rates, and several strong indicators in the US (read story about this).
There is great potential significance to this breakout, assuming it remains in tact. IF this turns out to be the bottom for bond prices, rising 10-year rates will translate into rising mortgage rates, bad news to a sector already weakening that has provided so much of the basis for economic advance. Second, bond prices tend to peak ahead of stock prices (historically), so the days of a bullish stock market might be numbered (REMEMBER my lecture on the signal given by declining year-over-year growth rates in real GDP and Real Personal Consumption Expenditures). Fortunately, though the yield curve had inverted in the most relevant way (3-month rate higher than the 10-year rate), this has reversed for now. Stay tuned!
There are "talking heads" saying that everything is well and stronger times are ahead. A good example is recent statements by Fed Vice Chairman Ferguson (read article). While I do believe we are not about to fall into the abyss of recession in the near term, I don't expect some surge in the level of economic activity that will be sustained for a number of years. That's what the persons who follow rates of change assume. As I stated in class, I am one of the rate of change in the rate of change crowd!
Finally, how does one find the new level of resistance for $TNX? I suggest switching the time frame in StockCharts.com from daily to weekly and extending the time period from the default of "Fill the Chart" to 3 Years. In other words, LOOK LEFT. WHEN USING WEEKLY DATA, CHANGE THE MOVING AVERAGE SETTINGS (divide the usual values by 5 due to 5 trading days per week). So, instead of 50-day and 200-day Moving Averages, change these to 10-week and 40-week values, respectively.
