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Wednesday, December 28, 2005
Market Recap
Today's volume was much like yesterday; in fact, today's volume was even lighter than yesterday's volume if you can believe that. This is a continuation of the holiday season when many traders take the week between Christmas and New Years off. Today, the markets were range bound in a tight range with the Dow gaining 18 points and Nasdaq and S&P both up 2 points. We suspect this action will continue for the remaining two days this week with volume drying up to a slow crawl by Friday afternoon.
Due to the lack of commentary subjects relating to stocks because the market is putting us to sleep, and since there is so much talk of an Inverted Yield Curve, I thought that we would talk about the bond market a little tonight and how it relates to the stock market.
The Bond Market
Markets based in the U.S. or worldwide do not always act as separate entities. They are interrelated in many ways and are affected by developments in other markets. When money comes in or goes out of the U.S. stock markets, it will go into other markets, such as the fixed income market (bonds), commodities, or currencies. By looking at these other markets we can better analyze from a technical standpoint, the odds of a particular market moving in a certain direction. This might provide opportunity in certain market sectors. We will look at the bond market and try to explain the way it interrelates with the stock market.
The bond market that we will refer to is the U.S. Treasury Bond market. U.S. treasury bonds are issued by the U.S. Government to finance its diverse expenditures. These bonds are "zero coupon". This means that they do not pay a regular quarterly interest "coupon". Instead, they are placed at a discount to their face value. For example, the U.S. Treasury is placing a one year bond that would yield 3% at expiration. In order to pay the interest rate, the treasury will place a bond with a face value of $1000 at a price of $970. Then, at the expiration date (1 year), it would redeem the bond for its face value. Thus, the holder would receive $30 additional to what it paid for the bond, which would equal a yield of 3%. From this explanation, we can conclude that the yield to price relation of these bonds is an inverse one. That is, when the prices of these bonds rise (more demand than supply) the yield will decline and vice versa. Traders will often look at specific expirations for clues as to the market's expectations in regards to interest rates, and as a way to analyze the flows of funds in this market. The most popular expiration for traders to watch is the 10 Year Bond.
Bonds and stocks often interact in very specific patterns as supply and demand of funds flows between these two markets. One basic principle says that rising bond prices (lower yields) would go hand in hand with higher stock prices. As yields in bonds fall, investors gravitate towards stocks because they feel bond investments are not paying enough return. The opposite is true when interest rates rise. As bond prices fall, the yields move higher. Investors exit stocks for the more favorable bond yields. If yields are moving up, then the mindset of some investors is, “Why risk money in stocks when I can get a risk free, much safer play in bonds with a decent return (higher yield)?” Of course as investors flock to bonds, it causes bonds prices to move higher producing lower yields. Thus, bonds work just like stocks - the first ones in and the first ones out make the most cash and the cycle starts all over again.
Professional traders will look periodically at a bond price or yield chart, trying to determine whether the bond market confirms the current stock market trend (as long as bond prices keep acting inverse) or whether there is a discrepancy in this relation that will make us look closely for signs of potential reversals. Intra-day, we look at a 5 minute chart. The bond market closes at the 3:00 pm. Its direction at the close will likely determine if stock traders will accelerate their trading, or whether they will reverse their positions or just close their positions for the day.
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STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts we have annotated for each stock listed in the past.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings you can either use this link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
For New Members:
Please take a moment to read the "How To Use The Bulletin" link at the bottom of the Bulletin page on the website. It is critical you understand how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented. |
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