In 2007 we wrote a weekly called Don't Leave the Party, But Start Drinking Water. Its purpose was to warn investors that risks were increasing, but that our indicators suggested that the bull market had further to go. We have a similar view today. However the party analogy seems inappropriate for a cyclical bull market that has merely regained about half of its 2007 to March 2009 decline. This time we feel it is more appropriate to use the five US security risk categories: low, guarded, elevated, high and severe. We think growing investor skepticism regarding sovereign credit has the potential to escalate and hence we now regard risk levels as elevated.

David Fuller's view Widespread concern over sovereign debt is similar to a banking crisis in that it invites 'whose next' conjecture. This led to Euroland's unflattering barnyard acronym and has spread to the UK, USA and Japan. How realistic is that?

The concern is real enough and markets are driven by sentiment, as we know. Stock markets show some downward dynamics today (see Eoin's chart review below). Having looked at government 10-year yields yesterday, using weekly charts for the last decade, I am posting the inverse picture today, represented by interest rate futures for 10-year bond prices.

Euro-Bunds (German government debt) (daily & weekly) saw some 'flight to quality' buying today but the weekly chart confirms that prices are historically high. Consequently this could be a top area with right-hand extension, as taught at The Chart Seminar. This possibility would increase with a break in the progression of higher reaction lows, with the last one being near 120.85. Euro-Bund futures should be among the last to go if government bond prices are to fall globally (yields rise).

UK Gilts (daily & weekly) show a completed top with right-hand extension on the weekly chart and appear to be forming the first step below that top formation within the downtrend. However Gilts encountered some support from their December reaction low yesterday and today, and the BoE retains the capacity to squeeze bears, intentionally or unintentionally, with its QE policy. Gilt futures would be among the first to resume their downtrend in a spreading sovereign debt crisis.

US 10-Year Treasury futures (daily & weekly) weakened sharply in December 2009 and a break beneath 115 which persisted for more than a few days would considerably increase the top formation characteristics evident on the weekly chart. However they had an upward dynamic today and further QE remains a hazard for all those widely quoted bears in hedge fund land.

Japanese bond futures (daily & weekly) have been a graveyard for bear traders who retained short positions over the last two decades. Today, prices are ranging beneath prior resistance just above 140 and a close beneath 138.50 would signal somewhat lower scope.