Financial Rally

By Colin Twiggs
July 31, 2008 7:00 a.m. ET (9:00 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.


The S&P Financial index is undergoing a typical V-shaped bear market rally, coinciding with a mid-July sharp spike in volume. Twiggs Money Flow, however, signals continued selling pressure and the rally is likely to fail.

Standard and Poors Financial Sector Index

The Dow is expected to encounter strong resistance in a band between 11750 and 12000. Respect of resistance would warn of another test of 11000; while breakout above 12000, though unlikely, would indicate a test of 13000.

Dow Jones Industrial Average

Crude Oil

West Texas Intermediate Crude respected support at $120/barrel. Reversal below $126 would indicate another retracement to test the support level. Recovery above $128 is less likely — and would signal a sharp rally.

West Texas Intermediate Crude

The Fear Index

The spread between the fed funds rate and 3-month T-bills has subsided, signaling an easing of tensions after passing of the housing/GSE rescue package.

The Fear Index: fed funds rate minus 3-month treasury bills

Treasury Yields

Ten-year treasury yields consolidating in a narrow range above 4.00 percent indicate another test of 4.25 percent. Reversal of the current rally in financial stocks would cause yields to fall. The yield differential (with 13-week treasury bills) remains healthy at above 2.0 percent.

10 year treasury yields and yield differential with 3 month treasury bills


The spread between 10-year treasurys and the equivalent TIPS rate is falling even as worldwide inflation is rising. The need for security may be distorting the normal spread.

10 year treasury yields minus 10 year TIPS

Financial Markets — Commercial Paper

The increasing spread between financial commercial paper and the fed funds 2 percent target rate warns that the credit squeeze is far from over.

commercial paper rates compared to federal funds rate and treasury bills

Total commercial paper is trending downwards, reducing off-balance-sheet funding and adding further pressure on the financial sector.

commercial paper total balances

Corporate Bonds

Corporate bond spreads remain high, slowing new investment.

corporate bond spreads


Fixed mortgage rates spiked up, in line with long-term treasury yields — increasing downward pressure on house prices.

30 Year Fixed Mortgage Rates Compared to Treasuries

Bank Credit

Credit growth is falling as banks shore up their balance sheets, slowing consumption and new investment.

bank credit growth

But the real credit squeeze is happening off-balance sheet, with huge contractions in mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and asset backed securities (ABS).

Issues of Non-agency Mortgage Backed Securities
Issues of Asset Backed Securities
Issues of CDOs


Consumer sentiment bounced slightly, but we are a long way from a recovery.

Consumer Sentiment

Pay your taxes but don't tip 'em — they're not doing that
good a job.

~ Kerry Packer, Australian billionaire renowned for
minimizing his taxes, as recalled by Paul Hogan.

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