Posted by: stockscooter | June 20, 2012

Time for a Turn?

The mortgage industry pegs it’s rates to the 10 year Treasury yield.  With recent data turning negative for home building, the current situation with interest rates won’t help.  The chart shows impending upward movement on rates on this long-term monthly chart.  Divergences are occurring.  The light blue trend line is showing lower lows.  The yellow lines are showing the divergence of higher lows. The orange line also confirms the divergence, because it’s a reverse mirror indicator.  Lastly, my first-to-turn proprietary indicator is about to turn upward (blue circle).  If it does, rates will be on the move upward.  This supports my recent warning on TIPS (Treasury Inflation Protected Securities) and also supports the possibilities of a Flash Crash, as also noted in a recent post.

What will nullify this read?  A break below the light blue trend line.  It would take a large downward movement before the month’s end, however this cannot be ruled out until the month is over.

What does this mean to the average investor?  First, since these are monthly candlesticks, we must be patient and wait.  However, we must be alert to the markets reaction after the Fed’s announcement today.  I don’t think the Fed or the news actually moves markets.  I think they more or less confirm the underlying process at hand.  That process is indicating a close here or higher for rates this month, which will turn my first-to-turn-indicator positive (green).

This all might seem untimely because of recent economic weakness, but I believe we are in a new paradigm.  We must watch for the unexpected.  One of my original pieces of analysis is quite unique and uncommon to the markets.  However, the chances of it occurring are building.  That analysis is for a upward break-out in interest rates, while simultaneously experiencing deflation.  Usually, rates go down with deflation or disinflation, because of economic weakness.  This time may be the first time ever, to my knowledge, that they may react in an uncorrelated fashion.  The cause of this would be from unexpected downgrades in the ratings of the U.S. Treasury Bond.  When downgrades occur, rates will rise.  This is because of perceived risk of non-repayment of principle.  The Treasury has already been downgraded to AA from AAA, by Standard & Poors.  That’s no laughing matter.   If Fitch or Moody’s join them, or if Standard & Poors take it down another notch, this will confirm my hypothesis.    Markets may move in unexpected trends and in odd correlations because of large over-riding themes we’ve never experienced before.  Moral to the story is, “Wait to see the whites of their eyes before you shoot.”  Let the new trend take place, first, before trading.   Don’t catch a falling knife. There will be plenty of time to make money, thereafter.   As always, do your own due diligence, and be extra careful out there.

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