The FINVIZ charts I follow finally show that the large and small traders combined have taken a very small net long position in the 30 year bond. This follows increasing interest amongst traders in the 10 year bond, which has now spread to the 30 year. This all got going in mid-March with the Cyprus banking mess. With the Bundesbank taking a public hard line on money-printing, ongoing depression in Spain, and several weeks of disappointing macro news in the US including multiple April Fed mfg surveys being punk, plus seasonal factors, bond markets are set up to make new lows in the summer for the fourth year in a row. I'm working on different models and will note them when that effort is complete.
This is beginning to resemble the 5-year stock run between the historic Republican takeover of Congress in the 1994 election, after which gridlock allowed both spending growth to be nominal and tax cuts to be made. This goosed stocks and bonds, stocks more so. Following the brief inventory restocking after the "Great Recession", the ongoing global macroeconomic weakness has led to the lowest interest rates globally in history. As with interest rates on the upside in the '70s into the early '80s, and stocks in the '90s into Y2K, so it may be with interest rates. Stocks look tired, and speculators have been heavily long them for 6 months. This is about how long a major upside explosion tends to last to mark the end of a trend. This was the pattern with silver in 2011, for example.
In any case, the powerful bond bull really got going, as mentioned, in mid-March with an upside gap. The stock rally really got going Jan. 2 with an upside gap. That breakout lasted over 3 months. If indeed something similar occurs with bonds, then stocks will do well to consolidate rather than sell off.
As a reminder, earnings are coming in at best as expected, with a good deal of downside guidance for Q2, and the quantitative Value Line estimate made at the end of 2012 for this year was for an average Dow of 13,440, though with a wide error range. This has had a good track record. My bias is therefore that downside risks exceed upside opportunity now. Thus we may see something that looks like 2011.
This is one of the best comments that I have seen in the past 6 months regarding what is happening in the Long Term (10 and 30 Year) Treasury Bond Markets. I personally purchased a fair number of 30 year TBonds about 3 1/2 years back after reading commentary by Lacy Hunt and A.Gary Shilling. Both were right on target at that time and I believe that You today have once again called the moment correctly. Like the two other folks mentioned above, I believe that we still have further to go regarding lower yields and higher prices. Bur, one has to be VERY careful and watch these yields and prices almost on a daily basis. There will some point in the not too distant future where this great long term bond phenomenon will end and inflation will return. Thanks again for a great post !
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