The month ahead: October 2007
Fundamental view:
The market is very nervous right now and does not know where to go. On one hand, we have a possible economic recession looming around the corner while on the other hand, we have market participants selling US debt because: 1- Possible long term inflation problems and 2- Foreigners dumping US debt in favor of Euro denominated debt and others.
This clash between the two views gives us relatively low daily volatility but very high intraday volatility as we have seen in the last week. This month data will be very important to help us figure out where growth is going and also where is inflation going. Right now, inflation seems to be marginally leveling off while growth is still there. In fact, looking to all of this more closely, it is only NFP and consumer spending that are affected... But they usually precede more serious troubles, so we will be looking for some confirmation in October's data.
Also, last point to check on our fundamental checklist is our liquidity/credit crisis. In apparence, things seems to be getting better but the market is still pretty tight. We still have a lot of bad news coming out of Europe while in North America, we just keep falling lower and lower in the home sector. Another sign that the market is pretty tight right now was the Libor that had a little run-up last week as people were scrambling for cash for the end of month and quarter picture...
Seasonal/statistical point of view:
October has a slight negative bias if we look back over 10 years, but over the last 5 years, the answer is very clear: Go short.
Looking now at our elasticity index, there is again nothing new there. Like in September, the index is standing right in the middle of its range stating the T-Bond is fairly evaluated compared to other assets and nothing interesting can be done over weekly/monthly horizons. Looking at it on a daily basis does not give more solace as no signals were clearly identified. The closest thing we had to a real signal was a partial alert to sell at the close on September 11. Looking back this would have been a great trade, but no official signal = no trade = no money... Too bad.
Technical point of view:
Looking back to what we had predicted for September we see that we opened the month with the bullish scenario but failed to break out of the top at 114-23. If we had broken it, we would have confirmed an almost 2 years double bottom and opened the door too much higher prices. In the end, the downward resitance line kicked back into play after being violated and we went straight for the first support at 110 where we held and bounced higher afterwards.
October is the first of a sery of tricky month because usually they lack a clear trend... They will drop like like a rock and from no where zip back-up in the blink of an eye rendering trend following very hard. So the play in those autumnal months is to play support and resistance.
Support levels to look at: 110-00 (Tested in September)
108-20 area
105-14
Resistance levels to look at: 112-00 (Tested on Friday)
113-15
114-25
The market is very nervous right now and does not know where to go. On one hand, we have a possible economic recession looming around the corner while on the other hand, we have market participants selling US debt because: 1- Possible long term inflation problems and 2- Foreigners dumping US debt in favor of Euro denominated debt and others.
This clash between the two views gives us relatively low daily volatility but very high intraday volatility as we have seen in the last week. This month data will be very important to help us figure out where growth is going and also where is inflation going. Right now, inflation seems to be marginally leveling off while growth is still there. In fact, looking to all of this more closely, it is only NFP and consumer spending that are affected... But they usually precede more serious troubles, so we will be looking for some confirmation in October's data.
Also, last point to check on our fundamental checklist is our liquidity/credit crisis. In apparence, things seems to be getting better but the market is still pretty tight. We still have a lot of bad news coming out of Europe while in North America, we just keep falling lower and lower in the home sector. Another sign that the market is pretty tight right now was the Libor that had a little run-up last week as people were scrambling for cash for the end of month and quarter picture...
Seasonal/statistical point of view:
October has a slight negative bias if we look back over 10 years, but over the last 5 years, the answer is very clear: Go short.
Looking now at our elasticity index, there is again nothing new there. Like in September, the index is standing right in the middle of its range stating the T-Bond is fairly evaluated compared to other assets and nothing interesting can be done over weekly/monthly horizons. Looking at it on a daily basis does not give more solace as no signals were clearly identified. The closest thing we had to a real signal was a partial alert to sell at the close on September 11. Looking back this would have been a great trade, but no official signal = no trade = no money... Too bad.
Technical point of view:
Looking back to what we had predicted for September we see that we opened the month with the bullish scenario but failed to break out of the top at 114-23. If we had broken it, we would have confirmed an almost 2 years double bottom and opened the door too much higher prices. In the end, the downward resitance line kicked back into play after being violated and we went straight for the first support at 110 where we held and bounced higher afterwards.
October is the first of a sery of tricky month because usually they lack a clear trend... They will drop like like a rock and from no where zip back-up in the blink of an eye rendering trend following very hard. So the play in those autumnal months is to play support and resistance.
Support levels to look at: 110-00 (Tested in September)
108-20 area
105-14
Resistance levels to look at: 112-00 (Tested on Friday)
113-15
114-25
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