07-14-2017: September Treasury Notes: Global Tensions, N. Korea Expected To Be Around for a While

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors

01     1


We are in an interest rate tightening cycle, so treasury notes should be falling in price, right? Time after time, we have been fooled on that one. Part of the problem is the time duration of financial commodities, which cannot always "wait out" the cycle. In the meantime, there are little ups and downs caused by world conditions and economic reports affecting the short-term, where "short" could mean months.

The North Korean problem rattling markets, and U.S. economic stagnation (by some measures at least, awaiting action from Congress on tax reform or infrastructure) appear to both be with us for a while. This along with some lower-than-expected economic reports gives rise to safe-haven investments like Treasuries. The next rate hike by the U.S. Fed is now given odds less than 50% before December.

Intermarket Analysis

We fed Treasury Notes, Treasury Bonds, and Eurodollars into a neural network to get the following result:

Parabolic Chart

September Treasury Notes:

Parabolic Chart

Nirvana Chart

September Treasury Notes:

Initial Chart

News Analysis

Treasuries are back on favor on Chinese rhetoric warning that threatened U.S. military action aimed at regime change in North Korea would bring China in on the side of North Korea. Stock markets started hearing lower on global worries, which also favors Treasuries. Inflation remains unchanged throughout a large portion of the world, making interest rate hikes less likely and notes and bonds go opposite to interest rates. So that also is supportive for Treasuries. Any negative inflation indicators such as smaller-than-expected gains in the Consumer Price Index would also favor Treasuries. This is the case for the latest CPI Index.) There has been a healthy supply of new Notes at Treasury Auctions, which is negative for Treasuries. Geopolitical safe haven support is outweighing this. There has been recent increased demand for Italian bonds, German bunds and UK Gilts which is supportive. Data from Economic Research Institute (ECRI Weekly Leading Index) is the lowest in 12 months, but nonetheless near a peak which often foreshadows recessions.

"Soft U.S. data flow" seems the order of the day suggesting continued support for Treasuries. Notes tend to correlate inversely with equity markets, and this is reinforced by safe-haven buying.

Russia's Lavrov declared Russia and China plan to defuse the North Korean crisis. Most people are skeptical that such a plan even exists.

Interest rates on notes are at six-week lows. Softer-than-expected inflation data decreases the likelihood of an interest rate hike at the Federal Reserve's October meeting and slips expectations for that back to December. The CPI edged up just 0.1% last month after being unchanged in June. The data points to ongoing slow growth. Actually futures are considered to have priced in only a 36% chance of a rate hike even in December, down from 54% a month earlier. Some of that analysis is based upon a steepening of the yield curve, making farther out securities seeing higher interest rate increases than nearby ones. One would expect the opposite if rate hikes were imminent.

The last thing markets want is tension between the U.S. and North Korea.

Mortgage rates also slid to 6-week lows as North Korea worries drove the rally in Treasury Notes.

North Korea worries may not be the biggest worry for equities. August is historically the most volatile month. The deepest market selloffs often happen in September and October. Some think it is due to a psychological need to harvest profits, and hunker down as weather cools. Margin rates are increasing along with volatility in the markets, discouraging some trading. We are in an interest rate tightening cycle, which makes other investments more competitive with equities. Various "divergences" for various groups within the market produce signals that precede a directional shift. Investor sentiment is very high right now, making the market more vulnerable to surprises as sentiment starts to roll over. And one analyst points out that years ending in "7" have almost always been a train wreck in late summer and fall. And according to the Dow Theory, the Transport Index is not confirming the present bull market.l

The last Treasury yield drop and Note rally was during Britain's exit from the Europen Common Market. The current N. Korea tensions seem to be on par with that for effecting markets.

Tesla Motors first foray into the bond market resulted in investors snapping up $1.8 billion in bonds, indicating high enthusiasm for bonds and notes. This was even though some analysts described Tesla's and "horrible bonds."

Perhaps it is bluster, but if one wanted to bank on North Korea making good on a threat to launch four missiles into the waters surrounding Guam as a further provocation, that would probably sink stocks and send Treasuries soaring higher.

Point & Figure Chart

133.0I                                                                  R  8/11
     I IMM - Sep-17 Treasury Notes, 1/32 pts $100K Cm.=0.03  Lim.= 2.3
     I            X   X
     I            XOXOXO
     I            XOXOXO
     I            XOXO O
     I            XOX  OX X
     I          X X    OXOXOXO  X
     IX         X X    OXO OXOX XO
     IXO        X X    OX  O OXOXO
     IXO        X X    O     OXOXO
     IXO        XOX          O OXO    XO
     IXO        XOX            OXOX   XO
     IXO  X X   XOX            O OXOX XO
     IXO  XOXOX XO               OXOXOXO
     IXOXOXOXOXOX                  OXO O
     IXOXOXOXOXOX                  O   O
     IXOXO OXOXOX                      O
     IXO   OXOXOX                      O
     I     OXOXO                       O                            XO
     I     OXO                         O                            XOX
     I     OX                          O                            XOX
     I     OX                          O                          X XOX
     I     OX                          O                        XOXOXOX
     I     O                           O                        XOXO OX
     I                                 O                        XOX  OX
     I                                 OX                     X XOX  OX
     I                                 OXOXO                  XOXOX  O
     I                                 OXOXO                X XOXO
     I                                 O O O          X   X XOXO
     I                                     O      X X XO  XOXOX
     I                                     OXOXO  XOXOXOX XOXOX
     I                                     OXOXO  XO O OXOXOXOX
     I                                     O OXOX X    OXOXOXOX
     I                                       OXOXOX    OXOXOXOX
     I                                       O O OX      O   OX
     I                                           OX          OX
     I                                           OX          O
     I                                           OX
     I                                           O
Our computer tells us a non-conventional reactive approach works best for on p&f charts. Therefore the above chart is taken as giving a buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and detected no reliable seasonal trend..

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Commodit." It is giving a buy signal. It comes bundled in with a Winters Times Series Forecast.

Internal Printout 1 Internal Printout 2

Results of "Commodit" for Treasury Notes (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system is working on a longer-term sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $1,000. Initial margin on a single contract is $1,265. Use of options is not advised.

Historic Range

Scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Treasury 10yr Notes December 126 Put and Sell (1) Treasury 10yr Notes December 126.5 Put @ 0.25 to the sell side or better.

o 1 o 2 o 3 0 4 o 5

Calendar Spread

What the Sep. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at 0.22 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at 0.38 or wider selling the near as prices are rising and then buying the far. At this time, we appear to be approaching the buy the far, sell the near point. This is a little trickier than normal because there is backwardization in the contracts (far worth less than the near despite any carrying charges.)

Level Table:

Level Table

The path of least resistance is up.
131.0|                                                                  R  8/11
 IMM - Sep-17 Treasury Notes, 1/32 pts $100K Cm.=0.03  Lim.= 2.3
     |GGVVWWWWWWWW[   <<<
121.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.371
               1 1 1 1 1 1                                            
       8 8 9 9 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 5 6 6 7 7 8           8
       1 2 1 2 1 2 0 2 0 2 0 2 0 1 0 2 0 1 0 1 3 1 2 1 2 1           1
       5 6 2 6 0 4 7 1 6 0 5 0 3 7 6 0 3 8 2 6 1 4 8 3 7 0           1

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 7/11 ).

Intraday Chart

                 Risk Versus Opportunity Report

               TYU7    September Treasury Notes

                      High Price:  128.3
                   Current Price:  126.8
                       Low Price:  126.1

                            Risk:  0.011
                     Opportunity:  0.024

                    (O/R) Ratio =  2.143

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals 0
Internal System 1 + 1
Internal System 2 + 1
Third System - 1
Historic Range 0
Commitment of Traders - 1
Range/Volatility - 1
Level Table + 1
Other Factors + 1
Total + 7
Place 11 September Treasury Notes on a Buy Watch with stoploss @ -1-37/64 (-1.58) below the get-in point when recent price is represented as "126-26 (126.41)".