The Bond Correction Is Becoming Ugly!
Saturday, February 2, 11:30 a.m. 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 [...]

Saturday, February 2, 11:30 a.m.

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.

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.


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.

By the way, wouldn’t it be more helpful to the tens of millions of investors and households who don’t pay attention or have an active interest in markets, but who have their IRA’s and 401k’s loaded up with ‘safe haven’ bonds, if they were reading in their newspapers that bonds are in a correction and losing their value quickly, rather than that money is ‘in rotation’ from bonds to stocks? ‘In rotation’ doesn’t begin to imply that down the road they may wish they had known that was a benign reference to the fact that they were losing money almost as quickly as in stock market corrections that safe haven bonds were supposed to avoid.

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. 

To read my weekend newspaper column click here:  Does the Market Have It Right on the Economy Again. 

A Note to non-subscribers: We have updated the sample issue of our newsletter to a later issue that you might find interesting. Click here: Sample issue of Street Smart Report newsletter.

Yesterday in the U.S. Market.

A positive beginning to the new month. The market was up from the open and closed almost on its high of the day. Volume picked up some with almost 0.8 billion shares traded on the NYSE, 1.95 billion on the Nasdaq.

The Dow closed up 149 points, or 1.1%. The S&P 500 closed up 1.0%. The NYSE Composite closed up 0.9%. The Nasdaq closed up 1.2%. The Nasdaq 100 closed up 1.2%. The Russell 2000 closed up 1.0%. The DJ Transportation Avg. closed up 0.9%. The DJ Utilities Avg closed up 0.1%.

Gold closed up $6 an ounce at $1,667.

Oil closed up $0.16 a barrel at $97.65.

The U.S. dollar etf UUP closed down 0.1%.

The U.S. Treasury bond etf TLT plunged 1.5%.

Asian markets closed mixed in their last session of the week.

The Asia Dow closed down 0.2% Thursday night (Friday in Asia).

Among individual markets:

Australia closed up 0.8%. China closed 1.4%. Hong Kong closed down 0.1%. India closed down 0.6%. Indonesia closed up 0.6%. Japan closed up 0.5%. Malaysia closed unchanged. New Zealand closed down 0.2%. South Korea closed down 0.2%. Singapore closed up 0.3%. Taiwan closed up 0.1%. Thailand closed up 1.7%.

Yesterday in European Markets.

European markets mostly closed up yesterday, at least the large ones. The London FTSE closed up 1.1%. The German DAX closed up 0.7%. France’s CAC closed up 1.1%. Italy closed down 0.7%. Spain closed down 1.6%. Greece closed down 1.1%.

Global markets for the week.

The favorable season rally continued in spite of the unexpected negative U.S. reports of consumer confidence dropping in January, 4th quarter GDP unexpectedly turning negative, and the unemployment rate ticking up in January.

THIS WEEK (February 1)
DJIA14009+ 0.8%
S&P 5001513+ 0.7%
NYSE8965+ 0.7%
NASDAQ3179+ 0.9%
NASD 1002763+ 1.0%
Russ 2000911+ 0.7%
DJTransprts5857- 0.2%
DJ Utilities474+ 1.0%
XOI Oils1,368+ 2.9%
Gold bull.1,667+ 0.5%
GoldStcks151.94+ 0.7%
Canada12768- 0.4%
London6347+ 1.0%
Germany7833- 0.3%
France3773- 0.1%
Hong Kong23721+ 0.6%
Japan11191+ 2.4%
Australia4941+ 1.7%
S. Korea1957+ 0.6%
India19781- 1.6%
Indonesia4481+ 1.0%
Brazil60351- 1.3%
Mexico45768+ 0.4%
China2532+ 5.6%
LAST WEEK (January 25)
DJIA13895+ 1.8%
S&P 5001502+ 1.1%
NYSE8904+ 1.3%
NASDAQ3149+ 0.5%
NASD 1002736- 0.3%
Russ 2000905+ 1.4%
DJTransprts5870+ 3.1%
DJ Utilities470+ 1.6%
XOI Oils1,330+ 2.0%
Gold bull.1,659- 1.5%
GoldStcks150.82- 6.5%
Canada12816+ 0.7%
London6284+ 2.1%
Germany7857+ 2.0%
France3778+ 1.0%
Hong Kong23580- 0.1%
Japan10926+ 0.1%
Australia4858+ 1.3%
S. Korea1946- 2.1%
India20103+ 0.3%
Indonesia4437- 0.6%
Brazil61169- 1.3%
Mexico45575+ 0.8%
China2398- 1.1%
PREVIOUS WEEK (January 18)
DJIA13649+ 1.2%
S&P 5001485+ 0.9%
NYSE8792+ 0.9%
NASDAQ3134+ 0.3%
NASD 1002743- 0.2%
Russ 2000893+ 1.4%
DJTransprts5695+ 2.2%
DJ Utilities463+ 0.9%
XOI Oils1,304+ 1.7%
Gold bull.1,684+ 1.3%
GoldStcks161.3- 1.2%
Canada12725+ 1.0%
London6154+ 0.5%
Germany7702- 0.2%
France3714+ 0.9%
Hong Kong23601+ 1.4%
Japan10913+ 1.0%
Australia4794+ 1.3%
S. Korea1987- 0.5%
India20039+ 1.9%
Indonesia4465+ 3.7%
Brazil61956+ 0.8%
Mexico45212+ 0.7%
China2425+ 3.3%

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Next week’s Economic Reports:

Next week will be a very light week for potential market-moving economic reports, Factory Orders, ISM non-mfg Index, Productivity, and a few others.To see the full list click here, and look at the left side of the page it takes you to.

And the 4th quarter earnings reporting season begins to wind down.

I’ll be back with the next blog post on Tuesday morning at 9:25 a.m.

To read my weekend newspaper column click here: Does the Market Have It Right on the Economy Again.

Subscribers to Street Smart Report: We will have an in-depth ‘Gold, Bonds, Dollar, Commodities’ update in your secure area of the Street Smart Report website early next week.


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