Bearish Trend Playing Out – Bonds Need to Shape Up

On Tuesday I discussed a few reasons why this week would be challenging for the bulls in Post Expiration Gives Some Ammo to The Bears. With the exception of Thursday, the holiday-shortened week has been weak with the bears have something to latch on to. I do like it when the market cooperates with the trends.

Pre-market trading indicates a weak opening after Thursday’s bounce back. I do not believe the bull market has ended. Let’s get that out of the way. I don’t even think this phase of the rally has ended. As we all know, the stock market has seen a really nice move over the past month, especially in the NASDAQ 100. No secrets there. This looks to me like a normal, healthy and telegraphed mild pullback. And one that I would be a buyer of for another run to new highs in early July.

Since last fall, I have often said that I love or like bonds. They were decimated which is always a good indication of forward returns and I saw the economy continuing to weaken, also favorable for bonds. And truth be told, I thought they would have rallied a lot more than they have. Frankly, I am a little disappointed.

After the August through October collapse last year which you can see on the left side of the chart below, we saw what I thought was the beginning of a one to two year bull market in bonds. And it may still be. But I am not overjoyed with how bonds have behaved since April. They are certainly not sensing recession anytime soon which is interesting since almost all economic measures except for the jobs market have weakened significantly.

Please don’t get me wrong. I still like bonds. I just want them to behave a little better.

Finally, let me leave you with an update of the yield curve which is just a fancy name for a long-term interest rate minus a short-term one. In this case I am looking at the 10-Year versus the 3-Month. See how the yield curve has been well below the blue line since last year? That’s called being inverted and has been an accurate predictor of recession. Right now we have the longest and deepest inversion in history.

Is it too much to ask for one sunny day around 80? I guess so, at least this year. Weather has been crummy, especially on the weekends, but it’s time to get some yard work done. We need a big stack of firewood for the pit and more than a few midsize evergreens have died that need to be cut down. And then there’s the never-ending task of keeping the weeds at bay. I guess I have my marching orders after some peace and quiet in the office this weekend.

On Tuesday we bought MDYHX and more levered NDX. We sold DRN, XLP and PMPIX. On Thursday we bought PGJ, EFA, more ICE and more team. We sold EWW, IYR, RYEUX and levered S&P 500.