Interest Rate Trendlines: Part 2

Today Jim Cramer advised traders to put the ten-year yield at the top of the quote screen and respect it.  He was right, since the market traded in lockstep with yields throughout the day.  We moved that symbol up on our screens a couple of weeks ago, since the battleground was becoming clear.

We see an issue of technical versus fundamental analysis.  In our prior post on this topic, we endorsed the fundamental analysis of interest rates rather than a trend line connecting two points.

Someone has raised the pot!  We now have a trendline with three (count-em) points! Michael Kahn’s technical analysis in Barron’s Online (subscription required) shows an interesting chart. 

Onag216_btcht2_20070606155337_2

Kahn says that the chart has "already confirmed the thirteen-year trend of declining interest rates."  He also notes that "the market remains in a five-year sideways pattern between 4.0% and 5.4%".  Please note that he is looking at the 30-year where our earlier chart looked at the 10-year, so the technical battleground is about the same.

Here is the ten-year chart and analysis from David Malpass of Bear Stearns.
Bear_chart_on_tenyear

While Malpass does not draw any lines, to us it looks like a gradually rising trend within the range.

We hope that readers will note how many different interpretations one can get from looking at varying time frames.

Our View on the Technical Analysis

At "A Dash" we try to remain objective and open to all analytical approaches.  We use technical analysis in the form of Vince’s models, carefully derived from many, many cases and tested on out-of-sample data.

We always ask whether a result makes sense.  Drawing a downward trendline on interest rates involves a clash with fundamental analysis at some point.  Interest rates cannot logically go below zero, so the trend must be broken.  Lower interest rates are generally good, but at some point, reached earlier in this decade, they signaled a fear of global deflation.

When interest rates bounced in 2003, that was a good sign — an indicator that the major fear had been averted.

Drawing a line on a chart does not capture this dynamic.

Conclusions

Malpass writes that "the current yield is high enough to allow near-term stability."  Dick Green, the level-headed President of Briefing.com has had an excellent predictive record in recent years.  He sees the current interest rate insanity as overdone.  As we have done so frequently at "A Dash" he notes that stocks are attractive based upon the forward operating earnings yield of 6.2% (a bit lower than the figures we have from Thomson Financial).

This is good advice from good sources.  We agree.

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4 comments

  • muckdog June 13, 2007  

    Yeah, but lets think about this…
    The recent numbers:
    GDP at .6%.
    CPI at 2.6%.
    Gas prices near highs.
    Foreclosures up 90% from 2006.
    I just can’t see the Fed trigger happy with rate hikes here. That’d push us to the brink of recession, if not just launch us over the cliff.
    The only thing that looks inflationary to me is the tight labor market and rising wage pressures. Which most of my friends on the Left tell me is a bunch of hogwash, made up numbers, and lies! (And that the unemployment rate is really closer to 10-12%…yadda yadda yadda).
    And you know what they say about charts? They’re a great way to predict the past!
    The yield curve is no longer inverted, and I know the Fed doesn’t control the longer term rates, but I don’t see the spread getting too wide here. I dunno…

  • Ward June 13, 2007  

    The GaveKal guys have a good point that with long term gdp growth of 3% and 2.25-2.5 inflation the long end should be trading around 5.3, and with virtually every country in expansion except Zimbabwe and Lebannon, 120 countries growing greater than 4% real rates have been abnormally low for sometime now.

  • Jeff Miller June 13, 2007  

    I am delighted to see some of the most insightful readers making such good comments.
    Ward seems on target with his interest rate analysis, a confirmation that rates have been artificially depressed for some time. This has implications for the yield curve addicts. Some think that it also affects the Fed Model, but my view is that every day Mr. Market presents a choice.
    And Muckdog — someone who has one of the most objective and level-headed approaches to be found. I always read his work as a reality check — not to mention the fun.
    My own view is a bit different right now, since the recent data are showing a lot more economic strength, but we shall see.
    Thanks for adding to the discussion!
    Jeff

  • RB June 15, 2007  

    Even more points here, just thought I’d throw it in:
    http://dollarcollapse.com/images/charts/lchart15.gif