Market Observations 05/01/06

A tell: Friday DJIA volume spiked by doubling, largest volume reading since early November.

Monday, intraday the DJIA at a new 6 yr high, NYSE all time high, OEX 4 yr high. Meanwhile, yields on the 10 yr note are near 4 year highs.

Effects of the yield curve inversion are starting to be felt. Oil over $74 and headed for $80-85, 10 year note over 5.15%, raging stagflation and further rate hikes ahead.

Additional risks on the horizon include: Iran with nukes, a tactical strike on Iran, a war with Iran, $100 oil.

We think this market is at or near a peak and may be near exhaustion, there is the potential for some serious consolidation moving forward.

We also think that $80-$100 oil, an Iranian conflict or a GM bankruptcy may not necessarily be the straw that breaks the camels back for the markets. What could be the unforeseen event that breaks the markets?

Combine higher commodity prices with the pass through inflation in the supply chain, sprinkle in a pullback on Asian purchases of US Treasuries, add a dash of the BOJ actually raising its rates sometime this year and you might see the the 10 year note breaking the 5.25% barrier and heading for 6%.

This would cause a chain reaction by deflating the US housing bubble, softening US demand for Chinese imports, causing a major pullback in the Chinese economy, which would also knock down Japan and Korea, as well as gold and other commodities globally. Just a passing thought.

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