Home > Uncategorized > 2012/03/23: Will Govvies get the ‘benefit’ of Equities ‘doubt’? Yes and No.

2012/03/23: Will Govvies get the ‘benefit’ of Equities ‘doubt’? Yes and No.

© 2012 ROHR International, Inc. All International rights reserved.

In spite of the buoyancy of the German Bund, govvies are still acting more like a market entering an intermediate term trend reversal to the downside. As we have not seen that since QE2 anticipation and implementation back in August-November 2010, some perspective might be useful. What we know for certain is classical macro-technical equities vs. govvies counterpoint trend activity is back.

Yet, that can appear confusing at times because of the leads and lags. Govvies tend to “interpret” the equities trend rather than respond with any immediate inverse activity. This was the case both before and after last week’s sharp trend activity in both asset classes. Govvies that held up well in the face of the previous equities rally were crushed by the June S&P 500 future push above 1,367-69 last week Tuesday.

That was in good measure because the equities indication was more prominent than the implications during any previous phase of the early year rally. Extensions of only ten or fifteen dollars could be inferred from S&P 500 violation of each interim resistance above 1,250 early this year. However, there was not much above 1,367 until the 1,400-07 range. And in addition to the extent of the rally, all of the US equity indices were out above last May’s major highs. That also eliminated any sense that a near term ‘crisis’ implosion of the equities was still possible.

As noted in our Govvies got those “Feels Like a Trend Turn Blues” post from last Thursday, that was the proverbial straw that broke the back of the ‘haven’ bid in the govvies. As such, it was not surprising that the sharp govvies weakness lasted until the June S&P 500 future stalled into 1,400-07 interim resistance range.

Initial Equities and Govvies Corrections

The equities have taken their first real correction since the June S&P 500 future last dip from 1,367 two weeks ago. However, those lags in the govvies response to equities price trend shifts were still apparent. Tuesday’s June S&P 500 future gap lower opening back below 1,400 did not really help the govvies much at all initially. Only on Wednesday’s second day of S&P 500 inability to get back above 1,400 in a meaningful way did the govvies begin to perk up. Yesterday’s June S&P 500 future gap open below Tuesday’s 1391.80 low finally brought an extension of the govvies recovery.

All very consistent with the classical govvies counterpoint to equities occurring on the differential: substantially a lag that responds more to the ‘sense’ of the equities trend than any immediate reciprocal reaction. And govvies bear market recoveries from sharp selloffs are especially contentious affairs. After the crushing damage experienced on the sharp selloffs, govvies can appear to be very weak for several sessions. At least until it becomes obvious the equities downside reaction is more than a brief ‘hiccup’ in the overall uptrend. Just as we have seen over the past couple of weeks.


Bund Benefits More on Classical Form

It is of note the June Bund future is already back above its fairly prominent 136.93-137.20 interim technical area (daily DOWN Break and lead contract congestion.) Even if the S&P 500 should only weaken to retest the 1,375-67 support (i.e. violated resistance), it would seem to leave the door open for a June Bund rally to its mid-138.00 to 139.00 area resistance. That would be quite a strong recovery near overall 140.00 resistance compared with the Gilt and T-note.

The latter two are still languishing much further down in their technical structure. Lead contract T-note was holding up near 132-00 prior to the recent crunch, yet the June T-note future is struggling modestly back above 129-00 in spite of equities weakness. Similarly the June Gilt future is nowhere near the 117.00 stall out of the lead contract last week. While it has managed to push well back above the 113.00-112.50 important interim range, major lead contract resistance awaits back up at 114.50-115.00.

Country Economics is the Key

While that may seem another point of confusion on the overall primary government bond market trend, it is in fact a very classical tendency. Let us allow that the situation is far more disjointed at present than during previous classical economic cycles. That said, in the old US-centric world America would lead the way into, and then back out of, the economic cycle. The US economy turning down first would encourage strength in the T-note; and leave the Bund languishing under the influence of the residual economic strength in Europe. Only later would the Bund gain any real strength as the European economy weakened.

And the inverse was true on the upturns in the global economy. The US govvies would tend to lead the way down on the American economy recovering first. On the other hand, the Bund would hold up very nicely under the influence of the weaker European economy. Of course, what we have now is more so the after effects of the major economic cycle dislocation in the wake of the 2008 financial crisis. The US was much weaker for longer than normal while Europe held up.

The European Sovereign Debt Crisis impacting the Continent means much more extensive economic weakness must be expected for some time to come. And that was amply reinforced by yesterday’s European Advance Purchasing Managers Indices. As such, expect the Bund to exhibit much more strength on rallies than its UK and US counterparts. This may be the beginning of the secular bear in primary government bond markets. Yet, the Bund can still act like a bull for a while during buoyant govvies recovery phases.

General Market Observations

All trend tendencies still remain very consistent with the views expressed in Tuesday’s (equities and govvies analysis) TrendView BRIEF UPDATE and Wednesday’s (foreign exchange and commodities) TrendView BRIEF UPDATE. However weak the equities may look on the multi-day selloff, any correction back to no worse than the 1,375-67 significant support (i.e. violated resistances) maintains the intermediate-term up trend. Even if June S&P 500 future were to slide somewhat below that area, there is all manner of intermediate-term support into the 1,350-40 area. Those include hefty congestion, and weekly technical indications which include oscillators, MA-13, MACD, and the last lead contract pullback low at 1,338.80 prior to pushing above 1,367.



And it will still be fairly critical whether June S&P 500 future holds that break, and ultimately pushes above 1,400-1,407. If so, next major resistance on historic congestion and oscillators is not until the 1,425-28 area, with the major 1,440 May 2008 high above that.

Of course, whether the equities stabilize against those supports will be a major influence on whether govvies stall out against higher resistances. Even though the June T-note future has now pushed back modestly above the 129-00 area, more prominent resistance awaits in the 129-20/130-00 area (major gap lower from last Wednesday and heavy congestion.)

Similarly in the other weak sister June Gilt future, as vigorous as the squeeze through the top of the 113.00-112.50 area appears at present, hefty lead contract resistance awaits back up in that 114.50-115.00 area.

As noted above, the exception to the relatively weak overall govvies technical structure is the strong sister June Bund future. It is already back above its 136.93-137.20 prominent congestion and daily up channel DOWN Break (seemingly being negated today.) As such, it appears a good candidate to reach its mid-138.00 to 139.00 area resistance on any further equities weakness.

There are only a select number of interesting developments in foreign exchange. Even though the EUR/USD and US Dollar Index are back to some recent interesting congestion levels, that does not appear to be very critical right now.

More interesting is the further evolution of the secular downtrend in the Japanese yen. After stalling at important resistance (yen support) of late, USD/JPY is back down to important support in the 82.25-.00 area. Similarly AUD/JPY is approaching 85.00, an important previous congestion and current up trend technical level. And the EUR/JPY is right back down in the low 109.00 area as well.

Thanks for your interest.

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