Musings of the Day

The Trade looks to settle down until the Friday payroll number absent un-foreseen headlines till then . In the meantime since the EU can develop their own “stress tests “ which are a PR event designed to justify giving taxpayer dollars to their favorite banks ( just like in the U.S.) I thought i should develop my own test to see if the stock market rally can continue.

Like the Central Bank tests , my test is completely un-scientific with absolutely no back testing or statistical probability assigned to the test. Here goes.

* I start with the theory  that since the fed funds rate sits near zero and the Fed really has little control over the more important long term rates, that in order to do something to save their /and our hides they have signaled that they are now really targeting the stock market itself.

* In order for the rally to continue economic data does not need to get better soon , it just can’t get worse or the plan fails. To me that says non -farm payrolls can’t fall below -100k, estimates for Friday are now between 70k and -70k. Above -100k and the rally continues.

* We need to see signs of some type of rebound in housing in the next 6 months or so! Crazy ideas are starting to float around about a one time move on all mortgages to a “market rate“ which is now near 4.5% . So many people with job problems or any one who purchased a home after 2005 ? It’s become impossible for most to take advantage of the lower rate structure. The rumors aren’t as illogical as they seem as the U.S. is in many cases the true holder of most mortgages via backing agency debt.

* Initial Claims , our weekly reminder of how bad the job market is , needs to start running consistently below the 400k level . If the Fed does succeeds in forcing stock prices up , traders will want to see this number turn around pronto. Trickle down was an illusive result from the first stimulus package in 2008, can the Fed achieve it this time around?

* Markets will want to see a healthier dose of inflation show up in CPI and PPI. These numbers are running at or below 0 currently, as deflation is an ugly thing( see the Housing Market)

* Gold needs to stay below $ 1250 . A move back above tells me money is fleeing world Equity markets not entering.

* Ten Year Yields need to get back above 3.25% if and when stocks rise. If yields continue to fall towards 2.5% the markets fail my stress test. Stocks will have a hard time continuing to ignore the ominous message the Bond market is sending for too much longer.