Thoughts on Bonds, SPX and PMs

1. I am bullish for the month of March. Nothing has been taking this market down. It is being pulled up by 1150 and maybe 1200. TRIN is predicting a bottom. TICK is uncomfortably high -- also shown by the surprising comparative strength in the Russell (which has been a warning signal in the past) and bonds are rising, but for now, I'll give the market the benefit of the doubt. PC ratio is also predicting a bottom and VIX is falling. The Euro refuses to go down. The moon cycle is bearish up to Sunday; today is the most bearish. The moon cycle, bonds, and the TICK are the only bearish indicators, if you can call the TICK bearish. Together, all this paints a bullish picture.

2. Is PMs also a great trade right now? I believe so. Gold wants to hold 1087, which is the 50% retrace of it's prior up wave. (I am already in this trade and will maybe buy SLW calls today.) However, I am as yet not sure if this is a ST or long-term trade. See point 4.

3. EW wise (and in the LT, I am an EW follower), in equities, this is either Wave 2 down or Wave 5 up. From the way we bounced off of 1040 ES, it does appear to be Wave 5 up, in which case my target is at least 1200 and possibly higher. This is what I am trading. Support from this comes also from the recent weakness in the dollar, and the strength in the Euro of all things. Against all predictions, the Euro is rising!

4. In the ST am unsure about the EURUSD. It seems to be making a base, but my main scenario is that this is Wave 4 up: 1.36 should be bought and 1.38 should be sold. Will this correspond with 1130 on the SPX? Will 1130 be sold? That's where the descending, LT trend line may meet the SPX in 4-5 days. I don't know, but for now, I am playing for 1200 SPX and 1.38 EURO. I am long Gold, and if SPX makes it to 1200, Gold will go to 1250, at least. For now, this is what I am targeting with the longer-term account.

5. Bonds and PMs (mid-term- 1 year out; in detail):

The situation for bonds and gold depends upon the same factors: growth and inflation.

The ST picture -- as I see it in my short-term indicators -- does not agree with the MT (1 year) picture as I see it fundamentally.

While there is massive supply of US bonds to fund the deficit, US banks are buying all those US government bonds with the money that the Fed is giving them. So, although the Fed is giving banks tons of money, banks are just turning around and buying government bonds, instead of loaning out the money. John Mauldin (http://www.frontlinethoughts.com/gateway.asp) claims that this is partly because there is no demand for funds, and partly because the banks need to fix their balance sheets. Demand for funds goes down in any recession, and so monetarists (the Greenspan-Bernanke crowd) flood the market. However, this time, I think the monetarists may fail. The massive contraction in credit may overwhelm their efforts to inflate. At least in the medium-term (Q3, Q4 this year and perhaps Q12011), I think credit will contract. In the longer-term, demand from the emerging world may kick in.

Also, the supply of loanable funds (in Britain and the US) will be constricted. Foreclosures are still increasing at a very rapid pace and banks are losing on their loan balances and expect to lose more on CRE. So as long as foreclosures keep increasing (which they will for the next 6-8 months, until there are better programs to stop them), banks will keep buying bonds and not lending.

This makes sense, and this is bearish for rates and equities and bullish for bonds. It means that the economy is not going to be growing very soon because a) there is no real demand for funds and b) there is no supply of funds.

Without consumer spending, there will be no real recovery. Corporate earnings will stagnate.

However, this buying of government debt by banks helps too; it does fix bank balance sheets, and it keeps interest rates low, which does promote economic health in the longer run. So, in the long-term, four years from now, when Obama is running for re-election, I think we will be in a better place.

When the economy starts to improve, the Fed will have to do a humongous mop up job. This may not be possible and if it isn't (and I don't see it being possible with some shocks) there will be serious opportunities in Gold and rates. Until then, I think bonds will continue to be bought (to some extent, perhaps staying in a declining channel) and equities will either hover in a range (say, 1050 to 1150) or fall (to 950 or so). (I believe that there is a strong volume-based floor under 950 SPX and another one under 900). This is my fundamental scenario.

But, as mentioned earlier, in the ST, there is a disconnect with all this:

The situation in Europe is bad, and the Euro failing creates strength in the dollar, which is bearish for risky assets and gold. Then why is the dollar struggling at these levels, and why has the Euro been rising? Why is the VIX so low and falling? If it barks like a dog and acts like a dog, then maybe, it is a dog.

6. Onto the LT

Because I don't think the mop up job will be easy, in the LR, I am bullish Gold and very bearish bonds.

Time frame and Outlook:

Bullish ES (up to 1200 at least) and Gold (1250?), perhaps up to May 1, bearish on both in the summer up to August (ES 900-950 and Gold 950-1000) . Bearish bonds starting August.

Trade Plan: Long PMs until late April; short the Russell in early May.