Earth to Stocks: Fed Likely to Hike

There have been nearly a dozen Fed speeches in the last few days with more scheduled this week. We’ve heard it all before: we know they want to hike rates. Friday though, reality set in with the jobs report.

The October report came in much stronger than expected with a drop in the unemployment rate to 5% and the non-farm payroll number at 271,000, which was well over the 190,000 expected. Average hourly earnings also moved higher by 0.4% from no change in the previous report.

On the surface, the only negative to this report was the participation rate, which came in unchanged at 62.4%.

Of course, a deeper examination of the numbers, which we covered in a press release Friday, shows most of the jobs were low-paying and not really worth celebrating.

But the point remains – the economy added a bunch of jobs, people think it’s great, and the Fed will likely raise rates.

Yes, yes – there’s a chance the Fed may again delay the hike for the umpteenth time if they think market stability is in danger.

But I couldn’t give a four-letter-word I’m not going to say because you might have kids looking over your shoulder.

The fact is, volatility has returned to an otherwise trendless Treasury bond market.

And for that, I’m happy. But first, a chart:

30 Year US Treasury Bond 30 Days 11-10

As you see, after 30-Year Treasurys traded basically within a tenth of a percentage point for six long, painfully uneventful weeks, yields broke out of that channel.

Bond traders obviously believe a rate hike is priced in for next month. They don’t want to be stuck holding lower-yielding bonds, so they sold them. Yields went up, and boom – volatility was back in the bond market.

And for me and the system I use in Dent Digest Trader, that’s all that really matters!

My system doesn’t care what the jobs number was.

It sure as hell doesn’t care what the Fed will do or won’t do in December.

Our only concern is what the bond market is doing, and how can we get on the winning side of that.

As I told those readers Friday, my system analyzes volatility in the long-term Treasury bond market. It identifies significant overreactions or divergences in price from the average.

When that happens, it signals an opportunity to position a trade for a “snap-back” to the mean. That’s the short-term strategy in a nutshell.

But we also identify long-term trend changes early on. That gives you an opportunity to position for a longer, potentially high-return trade with risk controls. That’s the long-term strategy.

Thankfully, the low volatility in the Treasury bond market has come to an end, and I expect there will be opportunities to profit in the near future!

It is interesting to note that while the bond market seems to be predicting a rate hike with near certainty, stocks don’t. Stocks actually ended higher Friday. If the Fed is indeed going to hike rates, you would expect the opposite.

Clearly there’s a tug-of-war going on with what the Fed says and what the Fed will actually do. Will they act according to the data? Or will they act to prevent a market sell-off?

I think the Fed should hike. They’re manipulating the markets with all this uncertainty. Just end it already!

But again, my system doesn’t care what anyone thinks or does. It just identifies opportunities to profit. More details here.

Lance Gaitan
Editor, Dent Digest Trader

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Categories: Interest Rates

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.