Simplicity May Be The Key

I would like to continue with the theme of my previous post (read here), in which I expressed my opinion on what may be the best approach in the rest of the year's trading. While my chart below may look very simple, it will be anything but simple to figure out why the long-term interest rates may move up towards the resistance. The fundamentals behind this probable move are going to be confusing at times. On one hand U.S. economy may look like it is accelerating, but on another hand the world economies are slowing down, and we can't be totally isolated from that. Pundits will be worried about the housing market collapsing, as the mortgage rates will rapidly rise. Also, the Fed will be a huge factor in pushing the rates up, as it may taper its purchases of Treasuries and MBS a lot sooner than many expected. "The great escape" may finally start when folks get their July bond funds statements, as that was the month last year when the rates hit the absolute low. Annualized losses (on principal) will scare the money out of those bond funds. The trillion dollar question is whether "the great escape" will turn into "the great rotation".

I showed in my post on May 12th how rapidly rising rates may affect the equities. Pardon my gloating, but this is exactly what is happening now. In my earlier days as blogger, I was told by one of the regular readers that my posts read more like a prediction of a sure thing to happen. He suggested that I should use "may" instead of "will" in my assessments of future market direction (and I used the word "may" ever since). This brings up an interesting point. Could the opposite be happening now to many market participants? As Bernanke surprised them with sudden hawkishness at his press conference, bond, equity, and commodity bulls bailed instantaneously and proceeded to do so in the matter of hours. Consequently, the QEInfinity expectations were totally erased, and TaperTrade is now fully in effect. It looks like many market players thought that the Fed may taper at some later point, but were absolutely sure that it will not in the near future. Market was not prepared for this event, hence the volatility ensued. It may take some time for things to settle down, as market participants take positions in their new and somewhat uncomfortable seats. Like I pointed out in my post just 10 days before equities topped on May 22nd, it took a full year to adjust to rapidly rising interest rates back in 1994 (read here). It may happen again.

These are truly important times for swing and position traders, as there are tectonic shifts occurring right before our eyes. You start to really appreciate the simplicity of charts in times like these. Follow the charts, as they will show you the way.

click on chart to enlarge