Strong market may be facing headwinds

Dow is still on one its best runs in history, with only a flattish pause period in Apr. 8776 was its starting point for the year & it looks like it wants to make take it out. The next barrier is the 200 day moving average (shown below). It needs to reach about 9.2K to break thru that resistance.


DJI vs 200 day moving avg - 2 months




A major part of the story behind the run up is the decline in fear. The VIX, volatility or fear index, has tumbled in the last 2 months from 50 to 32. While high by historical standards (20 used to be considered high), the reduction in fear has encouraged investors to reach for high yield securities. Individual junk bond funds, for example, have seen price gains of 50+% in the last 2 months with their yields plummeting to the 15% area (down from 20-25%). However ugly news (i.e. more junk bonds defaults) lies ahead, markets may have gotten ahead of themselves.


VIX ---- 2 months




10 year Treasury bond yields after falling to 2.1% at the end of last year have climbed back to 3.29%. The yield may be heading to the 4+% area, its more traditional level, even if the Federal Reserve resumes buying Treasuries. Rising yields not only mean the Treasury has to pay more on interest, but home mortgage rates will rise. Not good!


Treasury bond 10 year yields - 1 year



With only 3 weeks left, the possibility of GM failing is rising by the day. They have to get the vast majority of bondholders to accept a swap for GM stock, get unions to accept concessions & figure out how to close many dealerships peacefully, etc. This is all a lot for a bullish market to absorb.

• Experts say GM bankruptcy almost inevitable- AP