Municipal Bonds Continue to Get Hammered

Municipal Bonds have been annihilated the past 7 trading days. The pain was particularly bad today. I have stated on several occasions that the Republican takeover of Congress will not lead to the “blessed gridlock” of the Clinton years. The new Republican Congress will have no inclination to continue Obama’s mission of bailing out the Unions with taxpayer money.

The key beneficiaries of this money were the states, who were given several $100 billion so that they would not have to make layoffs - the vast majority of these potential layoffs being union jobs. If this money dries up, the states will be forced to make difficult fiscal decisions, like layoffs and cutting payments to municipalities. The markets are now starting to price in potential defaults in municipal bonds.

It turns out that the politicians in California lied about how bad its finances were, just a few weeks before the election. Now the real numbers are coming out and California is about $25 billion deeper in debt than was admitted in September (can we please throw these politicians in jail already!). This risk is being priced into California municipal bonds.

I know that it is written into the California Constitution that the state may not default on Muni bonds, but that does not preclude small municipalities from defaulting. There is a real risk that Harrisburg, PA will default in the very near future and that is also being priced in to municipal bonds.



Take a look at how some leveraged Municipal Closed End Funds have been trading recently (PIMCO and Nuveen top the list of pain) –

Silver Pounded, Stocks Holding Support

Although yesterday was pretty brutal for commodities, the uptrend for the stock indexes remains intact. It does so until these support levels are broken. Here are the obvious support levels for the Russell 2000 (TF Z0-240min) and the Dow (YM Z0-240min). If support holds, the party continues, if support is broken, then we may be in for a more meaningful correction.



Here is the hourly chart for the NASDAQ 100 (NQ Z0-60min). If resistance can be cleared, then look for the rally to continue. If 2164 is taken out, then look for more pain.



On the daily chart, the 30-year US Treasury (ZB Z0-D) has hit the support level I have been looking for. There is the potential for a pretty meaningful reversal from right about here. It needs to trigger. If support here fails, then this correction in bonds could get real ugly, real fast.

The yield has already rallied from 3.5% to 4.3% since September 1st (the day QE2 was announced). A move to $120 would put yields in the 4.7% range. Remember what I have been writing, that under QE1, there was a spike higher in yields, followed by a narrow trading range. The trading range on the 30-year Treasury was about 12% last year, so if you bought them wrong, you have some serious pain. If you bought them right, you had a nice year.

Today’s auction of the 30-year and the POMO purchase schedule announcement will probably have a big impact on bonds today.



Commodities had a very rough day yesterday, with several gold/silver stocks reversing 10% intraday. It was a news-driven event, as the futures exchange decided to raise the margin requirement for trading Silver. By definition, this sucks liquidity out of the system and lowers demand. The volume on the Silver ETF was about 25 times average! After a parabolic move, that is normally not a good sign. Commodities will have to be watched very closely here.

REITs also had a very ugly day yesterday and will need to be watched closely.

Updated Charts

Here are support and resistance levels for Apple (AAPL) –



Here are support and resistance levels for Baidu (BIDU) –



With Financials breaking out, here are resistance levels for Bank of America (BAC). BAC has crashed and is now bouncing. Resistance has held the entire way down. A breakout would be bullish for one of the biggest laggards in Financials.



Here is the S&P 500 (ES Z0-D). You can see that it is a few percent above support, but as long as that support holds, the uptrend remains.



The Euro (6E Z0-D) is pulling back and testing support. The chart of the US Dollar looks like the chart of BAC. When the Euro finally corrects, I am assuming that that will adversely impact commodities and stocks, so I am watching the Euro closely.



US Treasuries (ZB Z0-D) have been in a multi-week trading range. The price of the 30-year has been hit pretty hard, when you consider that it is a bond and is normally owned by conservative investors looking for income and safety. Nothing seems to be safe anymore. Everything is volatile…

Support is very close to the current price. Let me just note that I am watching US Treasuries very closely.

POMO Is Important for Stock Market Performance

POMO (Permanent Open Market Operations) does matter –

http://www.ritholtz.com/blog/wp-content/uploads/2010/10/pomostock1029101_big.gif



Today's POMO included the Fed buying back Treasuries that they issued only 2 WEEKS AGO! Bonds got creamed on the purchase, mainly the Fed only bought a small fraction of what was offered for sale by the Dealers.

Will Recent Trading Ranges Be Resolved This Week?

This is a potentially critical week, with the Fed, the Election and many key markets in trading ranges, but holding above key support. If they want to correct the markets on news, they can do it from here. If they want to break the markets out to new highs, they can also do it from here.

The S&P 500 (ES Z0-D) continues to sit in a 13-day trading range. It is still above support. The trend is up until that support gets taken out.



Gold (GC Z0-D) is at resistance in the 1360-1362 range. This is an important decision for Gold. The $1305-1309 level is critical support for Gold.



The Euro (6E Z0-D) is stuck in a 19-day trading range. The movement of the Euro will indicate what the Dollar is doing. Expect the Euro to continue to move with the prices of risky assets, so it would probably be a bad thing if this trading range fails.



US Treasuries (ZB Z0-D) are now at the low end of a 13-week trading range. The key support level is in the 128.11 range. That would set up a potential reversal pattern.

Trading Ranges for Recent Leaders

Corrections are healthy, because they allow you to rotate out of laggards and into leaders. Many leaders have been correcting here and are now sitting in trading ranges that will offer pretty defined entry points, if they trigger.

Silver (SLV) and Gold (GLD) have sold off since breaking their uptrend a 8-day trading ranges. I am assuming that the trading range will be resolved as a result of what the Fed will say next Wednesday. This is either a pause on the way higher or a retest of the highs before a meaningful correction.



Silver and Gold are not the only leaders that are pausing after recent gains. Apple (AAPL) is also in an 8-day trading rnage that follows the selling accompanying its earnings release. You can see that AAPL is falling below the trading range. I have also included the 120-minute chart to show support levels - $303.02 and $301.15 need to hold.



China (FXI) is looking like it topped. You can see that FXI traded sideways for 14 days and then sold off hard on Tuesday as the Dollar finally rallied. This trading range is now resistance. Watch FXI closely for failure from here.



China National Oil (CEO) has been a recent leader and been consolidating for much of October. A breakout will be obvious. The way CEO trades, if it is to extend this rally and not correct, it will most likely gap up to $214 -216 range the day it is broken out of this consolidation.



The US Dollar Carry Trade has been the key to the recent rally – where you borrow cheap US Treasuries and leverage the proceeds to buy risky assets. I think the Japanese Yen Carry Trade leading into 2008 amounted to over $800 billion in leverage. The Euro (EURUSD) has been a key beneficiary of this trade. You can see that the Euro has been in a 17-day trading range. It will either break out or break down and probably pretty soon. This will probably be the key driver for how recent consolidations of these leaders reconcile themselves.

Daily Support Holding Leadership Rotating

Daily support continues to hold. S&P 500 ($SPX) is clearing holding -



The Russell 2000 (TF Z0-240-min) has been sitting in a 2-week trading range. I like setups like this, because they offer close stop losses to help me manage risk. Resistance must be cleared to get me interested.



The NASDAQ 100 (NQ Z0-240 min) will gap up this morning and open in the resistance area.



US Treasuries (ZB Z0-D) are now in a trading range and near support with timing coming in next week. This will be worth watching as the Fed announces some version of QE2 on Wednesday.



Many leaders have been pulling back the past 10 days. The money continues to rotate and that is very bullish. You can see that enough money flowed into Semiconductors to break them out above a 6-month trading range.



The Gold Stock ETF (GDX) has pulled back the old breakout level and has been holding the 50-day for the past few trading days. There are some pretty obvious stop loss levels here.