Mel's Blog

Bonds are a little lower, and Stocks are a little higher...but I'm not so sure this trend will continue throughout the day.  This morning's market moves are likely nothing more than a head fake, due to "short covering" in Stocks.  Here's how it works.  Investors playing the short side - or betting that Stock prices will move lower - have had some healthy gains of late.  Playing the short side means that an investor borrows shares of the Stock, and then sells it before they actually own it.  They must eventually buy shares of the Stock in order to pay back the shares they initially borrowed.  So yesterday, Stocks were up big during the day, only to turn dramatically negative right before the market closed.  This morning, those investors playing the short side woke up to healthy profits, and as they cash in, they must buy those Stocks that they were short.  This buying pressure gave Stocks a nice pop higher to start the day, but as the buying pressure dissipates, I feel that the Stock market will continue its downtrend. 

All this ties into Bonds by way of their inverse relationship to Stocks.  As Stocks rally higher, money is pulled from Bonds as investors seek to ride the hot wave.  But when Stocks are on the decline, the proceeds from Stock sales often get parked in Bonds, which helps improve Bond pricing.      

Today's major news item was the release of the ADP Employment Report, with the significance being its tie-in to Friday's important Jobs Report.  The ADP number suggests that Friday's Jobs number will show approximately 80,000 new jobs created for the month of July, as opposed to the official consensus estimates of 135,000.  Although the ADP report is often quite different than the actual Jobs number, the number they are reporting is significantly less than what the market is looking for on Friday.  A few notes of interest - the ADP report has averaged a 48,000 miss in job count over the past several months.  And after revisions, the official Jobs Report hasn't shown a job creation number less than 75,000 during the past three years.  So although their track record isn't great, if ADP's number turns out to be close to Friday's official number, it will be a major disappointment for job growth, close to the worst performance in years, bad news for Stocks and good news for Bonds.

And here's some good news on Pending Home Sales...contract signings on existing homes climbed by 5% in June, the most in more than three years, and well above expectations. 

Technically, Bonds made a solid break yesterday above a tough ceiling of overhead resistance located at the 50-day Moving Average.  This level, 12bp beneath current pricing, now becomes the closest floor of support.  The closest ceiling is 12bp overhead, so Bond prices are now smack in the middle of the trading range.  I will keep an eye on the Stochastic Indicator, because Bonds are currently overbought, and may be vulnerable to an exaggerated sell-off if Friday's Jobs Report comes in stronger than expected.  I recommend Floating for now, as Stock prices will continue to influence Bonds.