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May 27, 2010 – The Dow’s Yo-Yo String is Getting Frayed

A positive 5-Year auction, but then yields rise overnight. Gold moves back above $1200 with the
euro trying to stay above its 120-month simple moving average at 1.206. The major equity
averages straddle the 200-day simple moving averages. Mortgage Applications rose for Re-
Financings but declined again for Purchases. Tax Credits for Home Buyers caused a surge in
New Home Sales in April. There are signs that Financial Regulations will be watered down to
worthless status.
US Treasury Yields – Wednesday’s $40 billion 5-Year auction gets a “B” grade as the yield came in at
2.13 and then closed richer than my annual pivot at 2.106. The yield is slightly above 2.13 this morning
as risk aversion fades. The bid-to-cover was 2.71, which is normal for this maturity. The Indirect Bid
was 41% slightly above my 30% to 40% neutral zone. Today’s test is $31 billion 7-Year notes which
ends the $113 billion deluge. My annual pivot on the 7-Year note is 2.684. The daily chart for the 10-
Year shows my weekly pivot at 3.32 with the 52-week low yield set Tuesday at 3.061.

Courtesy of Thomson / Reuters

Comex Gold – has become currency of last resort primarily on euro weakness. The 50-day simple
moving average is $1160.6 with the May 14th peak at $1249.7 on May 14th.

Courtesy of Thomson / Reuters

Nymex Crude Oil – remains oversold and in a trading range now between my quarterly value level at
$68.03 and my annual risky level at $77.05.

Courtesy of Thomson / Reuters

The Euro – has formed a trading range around my quarterly pivot at 1.2450 with this week’s resistance
at 1.2690. The euro is no longer oversold, but it’s not on the rise either. A monthly close below the
120-month simple moving average at 1.206 would be the first since April 2003

Courtesy of Thomson / Reuters

Daily Dow: The daily chart of the Dow is negative with the average below the 21-day, 50-day and 200-
day simple moving averages at 10,610, 10,816 and 10,273. It seems that the April 26th high at 11,258
ends the bear market rally since March 2009. The Dow Yo-Yo String is getting frayed, but another leg
down may wait until after next Friday’s employment data. We are just beginning the second leg of the
multi-year bear market that began in October 2007, which stalls on a close above 200-day at 10,273.

Courtesy of Thomson / Reuters

The major equity averages ended Wednesday straddling 200-week simple moving averages:
10,273 for the Dow, 1104 on SPX and 2226 on NASDAQ, which are pivots / resistances, 4100 for Dow
Transports, 629.51 Russell 2000 and 338.54 SOX, which are supports. This is another reason for
trading ranges to persist until the second week of June.

Fearless Prediction of the Week

We are in the second leg of the multi-year bear market which began in October 2007. The second leg
began with the highs of April 26th. “Dow 8,500 before Dow 11,500”! Having made this prediction
stocks should move sideways to up this week and next focusing on what I believe will be the last series
of positive economic data culminated by non-farm payrolls of 475,000 reported on June 4th.
The Mortgage Bankers Association announced that its mortgage Refinance Index rose 17% this
week as the 30-Year fixed rate mortgage fell to 4.80%. This index reached its highest level since
October 2009. On the flip side, the Purchase Index fell 4% last week and is down 27.1% over the past
four weeks and is 27.5% lower than a year ago. This index is at a thirteen year low.
Sales of newly built single-family homes surged 14.8% in April to a seasonally adjusted annual
rate of 504,000 units as consumers rushed to beat the deadline for first time home buyers and move-up
buyers. As a result of this demand the inventory of new homes fell 5.8% to only 212,000 units, the
smallest since October 1968. I predict that New Home Sales in May will give up all of those gains and
then some as the home buyer tax credits are over! Mortgage applications for home purchases have
already fallen off a cliff.
New home buyers must close on these homes by the end of June. That's just a month away. I bet
that some will walk away if they can't make the deadline to receive the tax credits. That would also put
any down payments at risk as well. Many home builders do not have the subcontractors to get homes
build in such a small window.
Barney Frank wants to kill the provision in the Senate's financial reform bill which would require
banks to spin off their derivatives operations. Credit Default Swaps were an important component
of the formation of “The Great Credit Crunch” and without control of derivatives the risk of additional
financial implosions remain real with $14.37 trillion of still on or off the books of out nation’s biggest
banks. The total Notional Amount of Derivative Contracts increased to a record $218 trillion according
to the FDIC.
That’s today’s Four in Four. Have a great day.
Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
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“I Hold No Positions in the Stocks I Cover.”