Are we Witnessing a Shift in Investor Sentiment?

As many of you who listen in to my regular weekly radio interview on the KWN Markets and Metals Wrap are aware, in my mind, the most important financial market is the bond or interest rate market. Everything revolves around interest rates and as such, those levels are the key in understanding where traders/investors are in their thinking at any given moment in time.

Take a look at the following chart denoting the interest rate being paid or the yield on the US Ten Year Note. Within the span of a mere 3 weeks or so, this yield has shot up from down near 1.4% all the way to 1.8%. That is a very rapid shift. It is now sitting at levels that we have not seen since the middle of May of this year.

From a technical analysis perspective, it has reached an inflection point. ON the way down, this 1.8% level, held the market in check back late last year and early this year. Once it was broken to the downside in May, it subsequently tried to rally back above that level but failed. From that point on, it was straight downhill.

Now it has regained this level. Where it closes this week is going to be critical to our understanding of where things are headed in the following weeks. Apparently, investors have moved past the European debt crisis in their thinking (at least for the present). Something has gotten their attention to the point that they are pushing up interest rates.

Now, whether the Fed is particularly happy with this remains unclear but one has to suspect that the last thing the Federal Reserve wants to see is these longer dated rates getting too far out of hand. Also, keep in mind that the higher these yields move, the higher the cost of servicing the gargantuan, humungous, mind-boggling, stupendously large (how's that for superlatives?) US federal debt burden will become.

Given the mediocre condition of the US economic recovery, it is difficult for me to envision yields breaching this overhead resistance level. Still with a great deal of speculative short positions in the US bond and note futures markets, their short covering might be enough to take them higher for a while longer. A lot of those positions were put on as a result of anticipating the "slowing global growth" scenario; in other words, deflationary forces.

If this market however does not reverse course soon, chances are we might have seen a long term low point in interest rates. Stay tuned on this one folks as it will have implications for gold.

Also, I am wondering if the following chart might have something to do with bond and note traders shifting away somewhat from the "falling prices" scenario. I doubt that this in itself would be sufficient to take the bloom off of the deflation rose but when combined with the soaring price of grains, it certainly has to regarded at the very least as a contributing factor.

Note that the gasoline market has retraced 61.8% of its entire decline from the peak made earlier this year. That is a key Fibonacci retracement level. If it powers up and through this level, particularly if it closes the week above this level, odds will favor a push towards $3.20 initially followed by a test of the high near $3.40 if the former level does not hold. Generally speaking, if a market fails at the 61.8% level, it will drop back towards the 50% level and retest that to see if the bulls are still eager to buy.

By the way, if the shift towards inflation fears has gained ascendancy over the fear of deflation, you silver guys will be very happy indeed. Again, let's watch what develops. It is still too early too tell and we are not out of the wood yet on the European debt mess but things are indeed getting interesting.