Interest Rate Trends and Market Impacts

1) RATES – Last month, everyone was worried that Japanese interest rates were going to wreck the world as the “carry t4rade” would unwind faster than markets can handle.  As is usually the case, it’s a good idea to head in a different direction than what media is screaming about.  Since JAN 20, the Japanese Gov’t Bone 10yr Yield is down to 2.13% from a high of 2.38%.  That is a pretty decent move.  Now, the top of TREND range is at 2.11%, so I’ll withhold judgement on its current bullish trend until the bottom of TREND breaks…that is at 2.04%.  Until that happens, Japanese rates probably do move higher in the intermediate term with resistance at 2.27%.  The MOVE Index is still bearish in trend, just testing people’s patience up to 70.10 on Friday.  That puts in the middle of its trend range (73.34 – 66.74).  Again, until it moves over 73.34 and holds, Bond volatility still has a downward bias.  Probabilities are on the side of bond volatility settling back down again, but it might have to tap that 73.34 area first, scaring market participants.  The UST 10yr Yield broke the low end of its TREND Support of 4.10% last week.  Today is just day 2 below that level, so like the JGB yield, I’ll withhold judgement on this until it hold below 4.10% past tomorrow.  Our Fed Front-Runner (UST 2yr Yield) is still below TREND, so it is expecting Low Inflation and what Warsh will do WHEN he sees those low inflation levels print.

2) SMALL CAP FINS – This past week, more stocks on the New York Stock Exchange hit new 52-week highs than at any point in the past year.  Breadth is expanding. Participation is broad.  And yet some stocks are still falling apart.  Yet there is one area of the market that is getting really interesting.  Small Cap Financials.  We're looking at the small-cap financials Index within the S&P 600 pressing against the upper end of a base that has been forming for nearly a decade.  Ten years of digestion.  Ten years of frustration.  Ten years of going nowhere.  That kind of compression does not usually resolve quietly.  If this structure breaks to new all-time highs, it's going to be difficult to make a structural bearish case for U.S. equities.  We're talking about a group made up largely of regional banks.  These are economically sensitive stocks.  They feel tightening credit conditions.  They feel recessions.  They feel stress before most groups do.  And they are threatening to break out.  Financials are the largest weighting in the small-cap S&P 600, ahead of industrials, consumer discretionary, technology, and health care.  So if this group expands, it's not a side show.  It becomes a primary engine.

3) VIX – VIX is tapping the top of its TREND level this AM.  Probabilities are on the side of VIX failing at the 22.42 level as VIX options expire today.  VIX spot (current price) vs. front month and 2^nd month are in what is called backwardation.  Spot is higher than front month, and that is higher than 2^nd month.  Most of the time, when in the midst of a bull market rotation, backwardation ends up being a decent buy spot.  Especially if that backwardation works out quickly (i.e., in a few days).