Something's cooking - but what?

Stocks pulled back yesterday but if you were in the F-fund as a safe haven, you were not spared.  The modest pullback in stocks was expected as stocks were extended after the huge rally, which was triggered by the rate cuts, but the precipitous drop in bonds was a surprise.

Bonds had made a nice run up and a small pullback should not have been a big surprised, but I didn't expect bonds to get hit this hard.   Even though percentage-wise, the drop in the F-fund was the equivalent to that of stocks yesterday, the 8 cent loss in the F-fund was one of the worst one day drops I remember seeing. 

With gold up big in the last few weeks and hitting long-term highs, oil now over $80 a barrel, the dollar continuing to drop hard, and a new cut in interest rates, inflation concerns have been stimulated again.  The bond market does not like inflation.  But it's more than that.  Something appears to be brewing.

The first chart below is the AGG which theoretically should mirror the action of the F-fund (but it doesn't always match day-to-day).  The pullback was severe yesterday but it is still contained within the upward trading channel. 


                                 Chart provided courtesy of www.decisionpoint.com

This chart is the yield of the 10-year Treasury Note.  It moves inversely to bond prices and the F-fund.  When yields go up, bond prices and the F-fund go down.  You can see how sharply yields have risen in the last two weeks. 


                                 Chart provided courtesy of www.decisionpoint.com

If you remember, Trader Fred moved out of the F-fund after it hit its stop loss last Thursday.  I guess I should have listened.  We could see a snap-back rally after yesterday's exaggerated selling.  The question is whether it is best to sell the rally or will the longer bullish trend in bonds (bearish trend in yields) resume? 

The G-fund's penny gain snuck up on us yesterday paying a day earlier than some of us expected.  It should pay every Thursday for a few weeks now. 

The S&P 500 took a breather yesterday and we're hoping we see a move at least to the lower end of this new upward trading channel so we can get invested again.  From a technical viewpoint, I suspect we won't see a move down below 1480 where the 20 and 50-day moving averages are, and 1500 could act as support as well, but as I said above, something is brewing in the world and I think something is going to happen to cause some major problems. 


                                 Chart provided courtesy of www.decisionpoint.com

Usually stocks sniff out problems before they happen, like when the Dow dropped 10% during the 2-weeks before 9/11/01.  But stocks have done well lately.  It's bonds, gold, the dollar, and oil that are sending the warning signals right now.  I'm glad the Ebbchart, Trader Fred and myself, are on the sidlines right now.

The EbbChart System has made some changes for early next week so take a good look at the charts.  It is in the G-fund today and was planning on being in the F-fund for Monday, but that has changed.  Check out the EbbChart page for all of the details. 

Trader Fred's TSP Trader System is also in the G-fund today.  Fred has some new submodels showing some positive activity but he is still watching them while they remain in a test mode.  For now, the system remains on the sidelines waiting for a buy signal.  Read more about it on Fred's system page.

Today is options expiration Friday (quadruple witching).  It could be interesting.  Historically, the week after options expiration is weaker than a random week, but September's post-options expiration has been particularly weak.  Since 1990, the week following option expiration in September has shown a positive return in the S&P only 2 out of 17 times.

The TSP Talk Sentiment Survey system remains on a buy signal and 100% S-fund for next week after the neutral 1.55 to 1 bulls to bears ratio.

That's all for today.  I am currently 100% F-fund.  Perhaps a weak-week-next-week will give us an opportunity.  The futures are up solidly as I write this, but I am nervous about "something."  I have no idea what it is, but be careful for a while.  Have a great weekend!

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