David Moenning Daily State of the Markets: 12/28
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Yielding to the Curve
Stocks waged a losing battle to a new boogieman yesterday. After spending the year fighting higher energy costs, the Fed, inflation, and the weather, yesterday, stocks were forced to confront yet another villain � the dreaded inverted yield curve.
Just after the open, the yield on the 10-yr T-bond dipped below the yield on the 2-yr Note. The event caused sirens to blare a loud warning in traders� heads, as just about anybody who�s been around this game for a while knows that an inverted yield curve (when short-term yields are above long-term yields) can be a very bad sign if it persists. You see, recessions and bear markets have been known to follow such an illustrious event. And although the condition was quickly rectified, as the 2-yr closed even with the 10-yr, the flirtation with disaster was enough to send buyers to the sidelines.
The question of the day, of course, was why were longer-term bond yields falling? There was no real economic data to cause yields to move from 4.39% to 4.34%. Yes it is true that the Richmond Fed Index came in at -2 versus the consensus estimates of 10. And yes, there was a report circulating that federal regulators have issued guidelines to begin cracking down on nontraditional mortgages. And then there was also the usual speculation about how horrible the holiday shopping season may end up being. But based on the steadily southern route of the price of the 10-yr bond, we might have to consider that bond buyers may have picked up a little momentum along the way.
And speaking of momentum, another explanation for yesterday�s drubbing has to do with the calendar. As we�ve opined several times lately, traders remember all too well how 2005 began. So with skinny profits on the books and the year on the line, it isn�t surprising to see some selling taking place. Some managers may feel that it is better to lock in a plus sign for the year than to risk the wrath that red ink tends to bring to manager�s paychecks.
Finally, we should be fair in our assessment of the inverted yield curve. While it is true that the U.S. has never experienced a recession without an inverted yield curve, the inverse doesn�t hold water. In other words, just because the yield curve inverts does not necessarily mean we will experience a recession. But heck, on a slow news day during a holiday week, who is going to quibble over details?
As for the morning indicators, with the exception of Hong Kong, overseas markets are adorned by green numbers; gold is continuing to move higher by $4.80 to $514.90; Oil futures are a bit more expensive this morning with the Jan contract trading +$0.18 to $58.34; Natural Gas continues to lose ground and is down another -$0.037 this morning to $10.985; bond yields are heading up a bit so far with both the 10-yr and the 2-yr yielding 4.37%; and finally, stock futures are bouncing before the bell (Dow +23, S&P +2.80, and NASDAQ +4.0).
So with all the focus on the bond market, the questions of the day are which way the yield curve will go and will stocks will continue to yield?
Stocks "In Play" This Morning:
MSFT � NY Post says YHOO likely partner to compete with GOOG/AOL
TGT � Reaffirms Dec sales guidance of +4% - 5%
WFMI � To replace KRB in S&P 500 on 12/30
CELG � Gets approval from FDA on Revlimid
CHKP � Downgraded at Oppenheimer
TXN � AmTech maintains Buy rating
Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: TXN
To see David Moenning�s Trading Record, his (Strong Buy) List, or the rank for any Top Guns Stocks, visit: http://www.AnotherWinningTrade.com/SI
Stocks waged a losing battle to a new boogieman yesterday. After spending the year fighting higher energy costs, the Fed, inflation, and the weather, yesterday, stocks were forced to confront yet another villain � the dreaded inverted yield curve.
Just after the open, the yield on the 10-yr T-bond dipped below the yield on the 2-yr Note. The event caused sirens to blare a loud warning in traders� heads, as just about anybody who�s been around this game for a while knows that an inverted yield curve (when short-term yields are above long-term yields) can be a very bad sign if it persists. You see, recessions and bear markets have been known to follow such an illustrious event. And although the condition was quickly rectified, as the 2-yr closed even with the 10-yr, the flirtation with disaster was enough to send buyers to the sidelines.
The question of the day, of course, was why were longer-term bond yields falling? There was no real economic data to cause yields to move from 4.39% to 4.34%. Yes it is true that the Richmond Fed Index came in at -2 versus the consensus estimates of 10. And yes, there was a report circulating that federal regulators have issued guidelines to begin cracking down on nontraditional mortgages. And then there was also the usual speculation about how horrible the holiday shopping season may end up being. But based on the steadily southern route of the price of the 10-yr bond, we might have to consider that bond buyers may have picked up a little momentum along the way.
And speaking of momentum, another explanation for yesterday�s drubbing has to do with the calendar. As we�ve opined several times lately, traders remember all too well how 2005 began. So with skinny profits on the books and the year on the line, it isn�t surprising to see some selling taking place. Some managers may feel that it is better to lock in a plus sign for the year than to risk the wrath that red ink tends to bring to manager�s paychecks.
Finally, we should be fair in our assessment of the inverted yield curve. While it is true that the U.S. has never experienced a recession without an inverted yield curve, the inverse doesn�t hold water. In other words, just because the yield curve inverts does not necessarily mean we will experience a recession. But heck, on a slow news day during a holiday week, who is going to quibble over details?
As for the morning indicators, with the exception of Hong Kong, overseas markets are adorned by green numbers; gold is continuing to move higher by $4.80 to $514.90; Oil futures are a bit more expensive this morning with the Jan contract trading +$0.18 to $58.34; Natural Gas continues to lose ground and is down another -$0.037 this morning to $10.985; bond yields are heading up a bit so far with both the 10-yr and the 2-yr yielding 4.37%; and finally, stock futures are bouncing before the bell (Dow +23, S&P +2.80, and NASDAQ +4.0).
So with all the focus on the bond market, the questions of the day are which way the yield curve will go and will stocks will continue to yield?
Stocks "In Play" This Morning:
MSFT � NY Post says YHOO likely partner to compete with GOOG/AOL
TGT � Reaffirms Dec sales guidance of +4% - 5%
WFMI � To replace KRB in S&P 500 on 12/30
CELG � Gets approval from FDA on Revlimid
CHKP � Downgraded at Oppenheimer
TXN � AmTech maintains Buy rating
Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: TXN
To see David Moenning�s Trading Record, his (Strong Buy) List, or the rank for any Top Guns Stocks, visit: http://www.AnotherWinningTrade.com/SI
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