Join        Login             Stock Quote

The Bond Correction Is Becoming Ugly!

 February 04, 2013 02:26 PM

A new catch word is spreading in the financial media, seeming to take over from the aging popularity of the phrases ‘risk-on' and ‘risk-off' of the last year or so.

The word is ‘rotation' and is being used to describe the supposed rotation of money out of bonds and into stocks – as it's finally being realized that bonds are in a correction.

I don't know if the money coming out of bonds is going into stocks – or vacation homes, or collections of single-malt Scotch and fine wines. Although stocks would be a reasonable assumption.

All I know is that money has been coming out of bonds since technical analysis and technical indicators reversed from a buy signal to a sell signal on August 16, and profits are being made in ‘inverse' bond etf's that go up in price when the price of bonds go down.

[Related -Automating Ourselves To Unemployment]

Technical analysis doesn't identify where the money that is coming out of bonds is going or who is doing the selling. It also doesn't know which, if any, of the ‘big picture' conditions might be causing the sell-off, or if it's just profit-taking from the overbought condition.

Nor does it care. All it knows is that money flow and momentum ran out of steam and reversed to a degree sufficient to trigger a sell signal. Which means someone began selling so heavily that it even offset the significant buying of the Fed's QE programs, and continues to do so.

[Related -Fed: Waiting For June… Or Godot?]

That happened back in August, and with the ‘rotation out of bonds' (why is Wall Street so reluctant to use honest words like correction, decline, even plunge), finally being noticed and showing up in headline stories, the correction seems to be accelerating.

The iShares 20-year bond etf TLT has now lost 12.5% of its value in 6 months, an annualized pace of -25%.   

When will it end? The flip answer would be when we get our next buy signal.

But as the top chart shows, bonds are still overbought well above the base price they pulled back to even in the panic crisis years of 2008 and 2009. If they are headed down to that base again they would have quite some ways to go yet.

Investor Sentiment.

For many years I have preached that investor sentiment cannot be used as a market-timing tool, but only as an indication (when it reaches levels of extreme bullishness or bearishness)  that it's time to watch actual technical indicators more closely, particularly those that measure conditions like reversals in money flows, momentum, internal strength, etc.

In last Saturday's post I noted that "This week's poll of its members by the American Association on Individual Investors showed the bullish percentage has jumped to 52.3%, and bearishness has dropped to only 24.3%. That's getting close to what our work has shown to be a danger zone, when bullishness rises to 55% or above and bearishness drops below 20%, where we need to be watching technical indicators more closely."

But this week the poll showed bullishness dropped to 48.0% while bearishness remained at 24.3%. It does indicate how individual investors tend not to follow a particular methodology or strategy and let their outlook be influenced by individual news items, or a one or two-day market reaction. (The poll is released Wednesday night each week, and on Tuesday it was reported that Consumer Confidence plunged in January, and on Wednesday that GDP growth had unexpectedly turned negative in the 4th quarter, and the market closed down on Wednesday).

With the market hitting new highs yesterday, the poll next Wednesday will probably show bullishness bounced back, unless the market's spike up yesterday has no follow through.

But in any event, the slow climb in the AAII investor sentiment poll to levels usually seen at rally and market tops, seems to indicate that short-term pullbacks notwithstanding, the favorable season rally is likely to continue.

But we will simply follow our indicators.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.