Thread: Knife Catching

Good Morning. Tuesday's markets were a good-old-fashioned ass kicking to those invested... almost anywhere. With decliners outvoting advancers by 3 to 1, don't kid yourself if you thought that's just a little consolidation.

As an aside, this should serve to highlight what a nice thing the G Fund is to Thrift Savings Plan participants... 4.9% for the trailing 12 months is not a shabby place to keep your money while waiting out the market's storms and looking for a better place to invest. I'll tell you this much, my E*Trade account sure don't give me that on my uninvested cash!

First off, an explanation of my nibble at the F Fund: What I'm doing here, folks, is called trying to catch a falling knife. Typically, you don't want to touch a chart that looks like this with a ten foot pole: (note that, as a fighter pilot, my risk tolerance may be higher than yours...)

The fire I'm playing with here is based on two concepts: Fibonacci regression and a resistance level on the 10 year bond interest rate. I'll explain. Note on the above chart that from the double bottom the AGG established middle of last year around 93 to the top just north of 100, it has now retraced right around 38% of that upward march. Don't ask me why (and I don't really care why - it just works), that tends to mark a turnaround point. Unless it doesn't.

Which gets me to my second concept - the resistance level on the 10 year bond interest rate: Looking at the next chart, notice that interest rates haven't exceeded 5 and a quarter since 2002. Due to the coincidence of these two observations, I've established a 20% bond position on the belief that mid-term interest rates likely will not rise further - which would stop the bleeding in bond prices. In fact, if this marks the top for rates - compare the two charts to see what bond prices did the latter half of 2006...

If rates continue to rise (pushing the F Fund lower), my stop loss for the position is at the 61% fibonacci regression level, equivalent to an AGG price of 95.7 or a 1.7% loss on my position. I haven't taken the time to crunch all the numbers (hey, I have a family and a day job too) - but I think my reward/risk ratio on this trade sits around 4/1.

In other news, I still say stocks are NOT where it's at right now. Yes, prices seems to have held to the 50 day MA (see charts below), which you'd think would be support. Notice, though how Friday's "rally" actually just established a lower high than the previous. It remains to be seen if a lower low will ensue - setting up a downtrend.












Meanwhile, bullish percents continue to turn lower. The markets are close to officially going on defense - which I've already started playing. I'll keep you informed.

Read more like this at my blog...