I have seen some skewed markets in my 30 plus years of trading. The current 30-year bond market now falls into this category. I detest bubble markets because they are always created in an artificial environment. The outlandishness of the environment creates a euphoric fantasy. Once reality is reintroduce to these bubble markets the downside surprises everyone. Was the stock market being held together by wire and duct tape? Tuesday showed some resiliency as the early morning pull back was met by bountiful buying which created more than a 10-point rally. Therefore this market showed some resiliency, at least short-term. I am always suspicious of powerful rally days such as yesterday. They tend to be one-day wonders. However, in intraday trading action a higher high was made and maintained, which is a bullish sign. Our advisory trade recommendation was reached for a handsome profit. If this market can take this environmental change and keep making higher plateaus we are in for some upside that could defy normal logic. Finally, the bonds suffered some adversity. They were incredibly overbought and have now corrected 2 full points.
The situation in Europe is very grave. The fear factor is becoming international. We are probably at a zenith of apprehension and uncertainty between now and next week. Any better than expected news will be like a millstone is lifted from the bull. The bubble is still inflated with the more critical news from Europe. These bonds remind me so much of the millennium euphoria that I saw in the 4th quarter of 1999. The 1st quarter of 2000 had a totally different appearance. Therefore we should see a surprising metamorphosis in bonds in the second half of 2012. These bubbles have a way of persisting and then imploding. It is never a pretty sight.
The bulls were unable to continue with Wednesday’s rambunctious buying in the final trading hour. Great buying horsepower, as evidenced by numerous plus 1400 ticks was not a residual the following day. It appeared traders entered into a holiday atmosphere early. The bond auction went very well, with record low interest rates. It was able to generate a rally on the news but did not hold. These bonds are heavy and tired.
The S&P 500 displayed its best performance in a couple months, subsequent to a six-session losing streak. Do not forget the holiday environment. The European problems are very near to the surface of the minds of many investors. With the euro communicating serious concerns about the Eurozone the stocks were not as robust as they should have been. I do not put a lot of credibility into preholiday market action. There are generally different players present whereby many usual day-traders are gone. Keep in mind that next week will be completing the month of May.
Happy Memorial Day weekend!