Wednesday, January 7, 2015

Similarities between Dec 16th Treasury Bear Reverse and Yesterday

There were six sessions between the strong sell session of Dec 5 and the Dec 12 high.  Similarly, there were 6 sessions between the Dec 24th low and Yesterday’s session.  Additionally, there was a rather strong rejection of the session high yesterday, just as there had been of the Dec 16th gains.  There was a higher open in session following the Dec 16 high.  That Dec 17th session made a bearish engulfing and settled well below the prior session range.  TYH5 opened higher again last night, but has thus far come lower.  A bearish engulfing similar to that of the Dec 16-17 would require a settlement at or below 127-23+, from current 128-07+. 

We are encouraged that the ‘cyclical yield low’ at 1.86% in Treasury 10 year from Oct 15th was tested and held.  Consistent with research dating to 1985, there have only been a few instances, in particular 2008 and 1987, where low yield mark did not hold. 

Lower oil prices and a strong dollar have created great concern that disinflationary pressure will be overwhelming.  At the same time, dislocation as a result of changed conditions for oil producers and ancillary industry has reverberated more strongly across leveraged loan and equity markets than many would have envisioned. 

The shock of lower oil prices is real.  Its impact on inflation will be transitory.  Longer term, a slow and steady recovery in oil prices would be more consistent with higher inflation than the plunging prices since June sould be expected to translate into disinflationary trends. 

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