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If Bonds Sell Off, Dealers are in Trouble and So Is the System

Primary dealers have maintained huge and heavily leveraged long bond positions. They are only lightly hedged. Just today, the bond market is threatening to reverse the long term downtrend in yields/uptrend in prices. It’s bad news for the bond market, and for the system as a whole. And that includes stocks.

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Mr. Minuschin’s Erection To Boost The Election

We have known for a couple of months that there would be a mountain of Treasury supply hitting the market at the end of September. We also knew that Fed QE would be far from adequate to absorb this supply. So I have expected something bearish for stocks at the end of September. This could spill over into the first week of October.

But then things get hairy for bears, with potentially happy days for bulls. Unfortunately, we have a little problem this week. There’s no visibility. We don’t know what they have planned for the next couple weeks. That’s different from usual, where we can usually see ahead for a week or two because we know the Fed’s QE schedule, and also pretty much know how much Treasury supply to expect.

Now, thanks to the exigencies of the past pandemiconomic US Treasury fund raising back in March and April, we don’t have that luxury on Treasury supply, which forces us to surmise some things.

Here they are.

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Macro Liquidity Rising But Other Issues Intrude

Composite liquidity continues to rise, but at a slower pace than in the second quarter as the Fed has slowed QE. That reduces the cash flowing into Primary Dealer accounts, which in turn contributes to a slowing in secondary liquidity drivers.

“Slowing” is a relative word, however. Historically, the numbers remain gargantuan.

No, something else is holding the market back. Here’s what that something is, and what we’re going to do about it.

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Bears Have A Chance To Break The Market

An important low is due right now but bears have a chance to break the market. This report shows you the setup and gives you picks to play both ways. Current long/short swing trade chart picks are up 6.9% (100% cash basis) on average, with an average holding period of 3 weeks. This week I added 3 short and 3 long picks. That leaves the list with 6 shorts and 10 longs.

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