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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (64385)	12/16/2000 11:23:35 AM
From: John Madarasz	Respond to of 99985

Lower interest rates are supposed to be good for the market. Treasury rates continue to fall. However, the 10-year note yield ($TNX) has fallen from above 6.5% to below 5.3% in the last 11 months and the market (especially the Nasdaq) continues to stumble. Perhaps there is more to it. (See $UST for 10-Year US Treasury Bond Price) As measured by the 10-year note yield, interest rates have been in a multi-year downtrend. Last year's advance in rates (fall in bonds) met resistance from the Oct-87 trendline and turned lower at the beginning of 1999. From the chart, it would seem that rates and the Nasdaq have a positive relationship. When rates rise, the Nasdaq rises. When rates fall, the Nasdaq falls, and believe it or not, this makes sense. Strong growth and inflation are bearish for bonds. When the bond market senses these, it usually falls (and rates rise). Weak growth and deflation are bullish for bonds, but not stocks. Rates advanced from below 4.5% in Oct-98 to above 6.5% in Jan-00, which indicated strong economic growth. This year, rates declined from above 6.5% in Jan-00 to below 5.3% in Dec-00, which indicates weak economic growth, less inflationary pressure and possibly a hard landing or recession. Part of the reason for the Nasdaq advance in the face of rising interest rates was the yield curve. There are different ways to measure the curve and I prefer the 10yr note less the 2yr note. During the last part of 1998 and all of 1999, the yield curve was positive (eg the 10-year note yield was greater than the 2-year note yield). This changed in Feb-00 when the 10-year note yield dipped below the 2-year note yield, producing an inverted yield curve and signally tight money. Also revealing is the spread between Aaa corporate bonds and the 10-year note yield. As the yield curve inverted, the spread between these two debt instruments widened. This spread bottomed in early Feb-00 and shot up as the Nasdaq Marched on to new highs in Mar-00. The Nasdaq has since declined, but the spread continues to widen and surpassed its Oct-98 peak recently. Until the yield curve returns to normal and/or the spread between Aaa and the 10-year note yield declines below 1.7, the market is likely to remain in bear mode. stockcharts.com -------------------------------------------------------------------------------- An excellent Weekly Monetary Report There were also a little more than $47 billion that flowed into money market mutual funds in November, $41 billion within the first three weeks. Sharemarket rallies could, therefor, be fairly steep. Yet a rally is not a volley. And inflation remains in the economic pipeline. There are no international financial emergencies. The U.S. dollar has been under pressure. Consumer sentiment remains high. Growth in the money supply is excessive. The Journal of Commerce only a few weeks ago reported three instances of increased shipping rates early in the new year. P&O Nedloyd just purchased more than 60,000 new boxes. Unions are reporting good to great contract agreements. Wage pressures re present. Mortgage rates are falling. I doubt the Fed will cut its rate next week. piraz.com Regards, John M