How to tell where the market is headed

If you're trying to guess the future direction of the US stock market, don't pore over the Fed's latest monetary policy statement. Look to the 10yr Treasury.

I'm not a big believer in government statistics. There are two reasons why First, I suspect the numbers can be fudged and finagled. Second, have you ever noticed how many times the economic numbers are constantly being revised? Truth be told, I trust my own eyes more than government figures.

I'll give you a prime example: The Federal Reserve's interest rate decisions. I find it pretty laughable that so many very smart people waste time painstakingly analyzing every word, comma and syllable in the Fed's monetary policy statements.

Now don't get me wrong Fed policy is obviously an important factor in the direction of the markets. But markets are powerful beasts and I listen to what they tell me more than the Fed. And 10-year Treasury bonds are telling me something pretty interesting right now

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US interest rates: The Fed Stands Still

Up to now, the Fed has pretty much indicated that interest rates aren't going anywhere anytime soon. For a year, the Fed bankers have concerned themselves with inflation in the face of rising oil, food and energy prices, but haven't seen the need to lift interest rates to offset those pressures.

But as the financial markets have slowly come to terms with the Fed's stance, Bloomberg wonders, ' if the Fed hasn't shot itself in the foot by harping on inflation risks, even as actual inflation has decelerated and the housing headwinds refuse to abate.'

And while the Fed stands still, 10-year Treasury bond yields look to be headed higher

10-Year Treasury Bonds Climb The Hill

Earlier yesterday, the yield on the 10-year Treasury bond climbed back to 5.14% from Tuesday's 5.04% reading, amid bond investors' expectations that the Labor Department's June job report, released tomorrow, will reveal a stout rise in payrolls. This number means the 10-year bond is up about 40 basis points on the year - and just a few weeks ago, the figure hit a five-year high of 5.30%.

But rather than blindly trust what the government spits out at us, let's talk technical

Take a look at the following chart, showing the 10-year Treasury bond yield.


From a technical perspective, the chart of the 10-year Treasury bond yield looks to be carving out a cup-and-handle pattern. No, this has nothing to do with afternoon tea in England but rather, a pattern where the price of the yield rises, then falls and creates a rounded base, then rises again to form a smaller base near the top.

Once it breaks out of that second base, prices tend to move sharply higher. And we're currently in the second basing phase. If the pattern completes itself, the yield on the 10-year Treasury bond should rise to at least 6%.

Prepare For Higher Rates

If that happens, Bloomberg may well be correct when it asserts that the Fed might have 'shot itself in the foot' with interest rates. If 10-year Treasury bond yields do march higher and the market decides to head lower, that would get my contrarian juices flowing. After all, I trust what I'm seeing with my own eyes more than the government's data, which will just have to be revised next month anyway.

Stay tuned we might get some pretty good contrarian moneymaking opportunities from this soon.

By Marc Lichtenfeld, Senior Analyst, Mt.Vernon Research for the Smart Profits Report.