Bonds in Bubble?

BONDS IN A BUBBLE?

We keep reading all these articles about how bonds are in a bubble and that any day now the
bubble will burst. Naturally when you see something going straight up, the contrarian in each one of us wants to say “Hey, that’s not right”. Many felt that way in the late 1990s when the NASDAQ was in its bubble with price earnings ratios over 100 and even as high as 200. So out came the short sellers, convinced that they would make a bundle when the bubble burst.

The trouble is that bubble markets can go higher and last longer then the early short sellers can stay solvent. Once they are forced to throw in the towel they contribute to the bubble with massive short covering.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• Short term buy signals are in effect.
• The first week of the year is supposed to set the tone for the year. It was a down week. So
  was last year.
• Despite that cheery bit of news this still does not preclude a rebound of some substance in
  the first quarter or so.
• We are holding a tentative uptrend.
• A break of 875 could set up a test of the November 20 lows.
• Next support zone is 860/870 and if that zone holds then the pullback is bullish.
• A rebound back over 920 would be bullish.
• Near term targets still appear to be at least 1100.
• We expect the early part of the week to be somewhat negative but if we hold the above
  zone and take out 920 it will be positive.
• Despite the bad news on Friday of the horrible job numbers the market did not fall out of
  bed.
• This is positive as we are holding against the backdrop of very negative news.
• Indicators continue to rise out of extreme oversold levels. There are still no negative
  divergences.
• We continue to view the market as a buy on pullbacks.
• Despite that we view this up move as corrective only.

TSX INDICES

The TSX Composite is now 7 weeks off of its lows. We managed a 1 per cent up week this past week. We didn’t particularly like the fact that we closed the week lower then where we opened giving the up week a definite down week feel. We may have some downside this coming week but we do view this pullback as a buying opportunity. For the first time since we topped in October 2007 we actually had a close over the 13 week MA another positive development. A way off in the distance near 12,000 is the converging 40 week and 4 year MA. The 40 week MA is poised to cross over the 4 year MA a definite negative development. Still that zone could be magnet in the event of any sustained rebound from the lows.

Eight of fourteen sub indices were up on the week. The down sectors were Consumer Discretionary, Consumer Staples, Materials (dragged down by Golds), Telecommunications, Utilities and Golds. All other sectors were up. Most have given buy signals for the short term trend with only Telecommunications and Consumer Discretionary still in a down mode. Healthcare received a boost from Biovail (BVF). Energy is also showing positive signs despite the ongoing problems with oil and gas themselves. [read more...]

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• Are bonds in a bubble?
• Most economists don’t even believe bubbles exist.
• If a bubble it is only government bonds participating.
• Cash pays no interest. US Government TBills also pay almost no interest. US Government bonds barely cover the rate of inflation and are vulnerable to falling prices.
• Some really long term charts for bonds.
• The current up cycle in bonds has been going on for 27 years.
• Clear cycle of lows roughly every 6 years. The last one bottomed in 2007 it may also have been 2006.
• In between cycles of either 2 cycles of 3 years or 3 cycles of 2 years.
• If we count from 2006 a cycle low did occur in 2008 on schedule with a double bottom in June and October 2008.
• If it is the 2007 cycle we should count from then we might expect another low later this year.
• If not then bonds have more time to work their way through for a top and the next cycle low is due in 2010.
• We examine the reasons for why interest rates are probably bottoming.
• The Gold/Bond ratio is also in a long term uptrend favouring gold but the recent action in bonds has favoured bonds over gold.
• We expect the long term uptrend in gold favoured over bonds to resume.
• Another reason for owning gold.

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