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

To: fedhead who wrote (12585)	5/1/1999 11:12:00 AM
From: pater tenebrarum	Read Replies (1) \| Respond to of 99985

Anindo: re: rates. 5,75% may look low in nominal terms, but it is rather high in real terms considering the (still)low level of inflation. i think that the stock market may be in for a spell of real trouble should 5,75% be broken to the upside. unfortunately, the june bond futures contract looks a real mess technically. see tfc-charts.w2d.com for confirmation. the only slight positives at this point are the historically low bullish consensus on the bond ,the fact that it looks somewhat oversold, as well as the recent strength in the DJ utilities index. the fed uses a model that compares the long bond yield to the S&P 500 p/e ratio. according to this model, the stock market is about 20% overvalued,which is about as stretched as it gets. although the stock market can survive rising yields for a while because earnings tend to rise concurrently initially, it will be unable to rally further unless the direction of bond yields reverts convincingly. rumor has it that bill gross shorted some 5,000 bond contracts in friday's session; needless to say, this is not a good sign. my current take on all this is that the stock market may hold up for a while in a trading range between 1260-1400 on the spx, until the bonds assault on the 5,75% level finally succeeds. if and when that happens, a 20-30% correction is not out of the question. i am currently using rallies to ditch most of my growth/high p/e positions.luckily i went into resource-based stocks shortly before they started rallying in earnest. i still believe they will be intermediate term outperformers, so i am using pullbacks to add to my positions in these stocks. at the same time i am hedging my positions in this group because i expect the whole market to suffer when the correction arrives. i dont like to be a doom-and-gloom monger, but i believe that sometime between may and july we will see a sharp downswing, including a few very scary days. note that my opinion may change if circumstances do. regards, hb