Sunday, October 21, 2007

Short Rate Drops and Other Ideas for a New Market Week

* Safe Haven - When markets drop, it's not uncommon to see capital flow to short-term Treasury bills. That reduces their yield. We also see short-term yields fall in anticipation of (or in response to) Fed rate cuts. I went back to 1992 (N = 3891 trading days and found 282 occasions in which the yields on the 6 month Treasury bills fell by 5% or more over a ten day period. Twenty days later, the S&P 500 cash index ($SPX) was up by an average of 2.29% (194 up, 88 down). That is much stronger than the average 20-day gain of .64% (2237 up, 1372 down).

When $SPX is down over a 10-day period and yields on the 6 month Treasury bills fall by 3% or more during that same time (N = 259), the next 20 days in $SPX average a gain of 1.34% (155 up, 104 down). When $SPX is down over a 10-day period and yields on the 6 month Treasury bills fall by less than 3% or rise (N = 1339), the next 20 days in $SPX average a gain of .77%. Aggressive reductions of short-term rates have generally been bullish for stocks. Worth keeping an eye on in the wake of Fed speculations.

* Turnaround in the Market Indicators - My Trading Psychology Weblog noted divergences two weeks ago as we made new highs; now we're seeing weakness across a number of indicators, including the NYSE TICK and 20-day new lows. Meanwhile, Adam Warner passes along some insights about the Hindenburg Omen pattern.

* Do You Trade Historical Patterns? - Brian at Alpha Trends makes the important point that he would never mechanically trade a historical pattern, such as the one I noted regarding action following very weak market days. I completely agree. What's key about that post is that a very weak market does not have a bullish edge in the near term, unlike other reversal patterns I've written about. When we get an expansion of new lows and weakening of downside momentum, it's not at all uncommon to find follow-up weakness 1-5 days out. Note, in Brian's wrap up of Friday's weak market, he tracks the 5 day MA to gauge intermediate-term market trend. That's something I'll take a further look at.

* New Resources - Fox Business Network has begun operations and offers ETF-based model portfolios. TraderNews tracks news headlines relevant to traders (including Asia and Europe) and updates index quotes and market news.

* Excellent Reviews of the Market - Bill Cara reviews the past week's performance in ETFs and various sectors. Abnormal Returns looks at market themes, including gold, stocks, and inflation. The Big Picture examines prospects for a Fed rate cut and an oil price shock. James Altucher finds some stock picking nuggets, including 10 stocks with significant insider buying.

* Odds of a Bounce - The Short-Term Trading blog looks at the odds of bounces of various sizes when we're oversold. Many of my trades are based on the odds of hitting previous day's high or low price and the odds of hitting first and second pivot point levels. That's another topic I'll be revisiting.