-->Last Friday the long Treasury bond plunged 110 points -- and now I want to see whether this trend continues. If it does, there'll be hell to pay. Rising rates are the dagger that will stab the Greenspan-Bernanke balloon.

On top of the Greenspan antics, the US continues to run massive deficits. How can the US continue to get away with this almost insane policy? For the answer I want to quote the words of Dr. John Hussman, to my mind, one of the most astute observers of the entire situation, and of course John runs the very successful Hussman Fund.

"The reason that the U.S. has been able to run these extreme current account deficits can be traced directly to China and Japan, whose governments have accumulated U.S. Treasury securities in the past few years at rates that can only be described as bizarre, in attempts to support the U.S. dollar and hold down the values of their own currencies. The “benefit” of this to the U.S. has been the ability to finance deep federal deficits and maintain an abnormally skewed yield curve, with short-term interest rates at less than 1%. The Federal Reserve's ability to maintain a loose monetary policy (and negative real interest rates) without upward pressure on market interest rates is more attributable to foreign accumulation of Treasuries than to any particular skill or even intent of the FOMC.
"Meanwhile, individuals and corporations have fully exploited the steepness of the yield curve. Corporations have swapped a great deal of debt into floating-rate structures (see Freight Trains and Steep Curves), while floating-rate borrowing has exploded to more than one-third of all recent mortgage originations, according to the FDIC, even while the equity (and credit quality) of homeowners has plunged. All of this has opened corporations and individuals to unusual risk in the event that foreign governments slow their accumulation of U.S. Treasuries and short-term interest rates advance."

Where is the stock market now? As subscribers know, the market has been severely oversold, and we've seen this in the action of the McClellan Oscillator which has been fluctuating in oversold territory for weeks on end.

A look at the point&figure chart of the S&P 500 is instructive at this point. The most recent vertical row of Xs is what we call a"high pole." On March 22 we received what we call a"high pole warning." When a high pole is formed, any decline from the peak must be watched. If the decline from the high pole peak fails to hold at least half its gains, there is a high probability that the entire high pole will be retraced.

Note that the retracement from the March peak at 1160 has taken the S&P back to the 1090 box. We're probably getting a rally some somewhere below the 1160 top, and then another decline. I'd say that if a forthcoming decline takes the S&P down to the 1080 or 1070 level, the S&P would be in trouble.

But as I write this morning, the S&P is rallying out of its oversold minor base. Subscribers should use this rally to unload any stocks they still hold (this does not include precious metal stocks).




Meanwhile, gold has not ignored the situation. For the first time, gold is rising against all the major currencies. Thus, unlike the previous situation, investors in Europe or Japan can see gold rising in price in terms of euros or yen. Quite a difference from recent action.

The chart below shows gold in terms of US dollars. With the March 23"double top breakout" gold has turned bullish on the point&figure chart. Now it appears that gold's next major move will be to attack the high at 428. The major breakout for gold will occur (based in this chart) if gold can climb to the 432 box.



The chart below may be the most important chart of the week - the 30 year Treasury bond. What I'm watching here is the declining histograms at the bottom of the chart. Note that after being above the zero line ever since October, the histograms appear to be heading below zero and to a"sell signal."

Ah, the questions -- are declining bonds (with accompanying rising rates) an indication of an improving market and the demand for more money? Or are declining bonds (with rising rates) an indication of increasing pressure on the whole US economic system. Or are declining bonds a sign that the Japanese are through buying Treasury bonds. Any way you look at it, it's going to be most interesting to see what happens if the bonds continue down and rates continue higher.

Emerald:
all above: Richard Russel's comment of to-day's closing!