Interest-Rate Party Is Not Over Yet For Wall Street

Date : 03/26/2010

The stock market has shown it can overcome growing concerns over China's monetary and trade policies, European sovereign debt worries, uncertainty about financial regulation and even overbought conditions. Now there's nothing left to stop the "exceptionally low" interest-rate gravy train, at least for the next several weeks.

The surge in the 10-year Treasury note yield on Thursday to a new high for the year is a warning that inflation expectations may not remain stable for much longer. But that can't stop the bull market by itself.

There needs to be a series of technical failures, backed by some fundamental driver, to change a trend this strong. Basically, the Fed has to make it obvious that it will start slowing the gravy train down. But since the Fed isn't scheduled to make its next policy statement until April 27, the major market indexes still have another month to reach their next upside targets.

The Dow Jones Industrial Average's first target is the 11150-to-11250 level, which includes both the 200-week simple moving average and the 61.8% retracement point of the bear market from October 2007 to March 2009. Above that, there should be resistance at the 11750-to-11850 area, since those that heeded that resistance in August 2008 were saved from the tumble caused by the Lehman Brothers collapse.

(The Dow Thursday had risen 109 points to an 18-month high of 10946 in midday trading, but was recently up 66 to 10902.)

For the S&P 500 index, the 200-week simple moving average and the 61.8% retracement of the bear market both come in between 1225 and 1230. The next point of reference is the August 2008 high of about 1315.

The Nasdaq Composite, which has already surpassed its 200-week SMA and 61.8% retracement level, should face some resistance at the August 2008 high around 2460, and then at the May 2008 high near 2550.

Given how prescient the financial markets tend to be, there is a chance that stocks will start failing at resistance levels before the Fed starts changing its stance. Especially if data out next week shows that the labor market is finally getting better, like St. Louis Fed President James Bullard expects it will. Or if Treasury yields keep rising, as the charts suggest they will.

Following a string of messy Treasury note auctions, the 10-year yield leapt 24 basis points over the last three sessions to 3.905%, and in the process broke above a downward sloping trendline beginning at the Dec. 31 high of 3.918%. The yield is now technically free to test resistance at the June 2009 high of 4.014%.

A close above that level would confirm the completion of a major inverted head-and-shoulders reversal pattern, which would in effect mark the end of a secular downtrend in longer-term Treasury yields that has lasted the better part of three decades.

At that point, the Fed will have no choice but to take more aggressive action to rein in inflation expectations, first with their words, then eventually with rate increases.

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