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Stock & Bond Valuations Dislocated at Trader’s Narrative

Stock & Bond Valuations Dislocated

Darn, I meant to post this yesterday but, ran out of time. Now it won’t seem as brilliant but what the heck… ;-)

After the recent panic selling, the relationship between stocks and bonds got out of whack in a major way. Basically, relative to each other, stocks were very cheap and bonds very dear.

This usually happens when investors and traders panic - they flee to the “safety” of bonds, pushing their prices up. But what we saw in the recent rout was monumental. We’re talking several standard deviations.

So to answer Keith’s question whether bonds are a sell, I’d say yes, although equally important: stocks are a buy.

After today’s gap down, we have an island reversal (see chart below). I was going to write yesterday that it looks bonds spiked up to 122.81 in an exhaustion gap. After the fact, this seems obvious. Nevertheless, according to Japanese candlestick patterns, it is still bearish.

sell bonds buy stocks dec 2007

The last time I hollered that stocks were a buy and bonds a sell was at the start of December (see chart above). It was a bad call on the stocks side, but good for the bonds, since they tumbled to almost 113.

Bond prices (30 year US government) have not been this high since the summer of 2003 (high of 121.67) and the summer of 2005 (high of 119.72). So prices poke their head just above resistance (taking out a lot of stops) and then headed back down.

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4 Responses to “Stock & Bond Valuations Dislocated”  

  1. 1 Scoad

    I doubt you were the only one to notice the island rev. so where’s all that bond money gonna go- MM funds headed to 0% already loaded to the gills w/cash. The amt of cash that could go into stocks and might eventually be forced there is stunning.

  2. 2 Tom

    So what are you planning on buying?

  3. 3 Jerry

    Do you ever trade forex?

    I’ve recently begun trading with an EA, the Avonko Elite system using only the GBP-USD forex pair, although I think you can use it for the EUR-JPY too.

    I’m seeing really good results and it’s all automated, it’s making me wonder why more people just don’t buy automated systems to do their trading? Although I guess for some it is more than just an income stream but rather a hobby as well.

    What are your thoughts, do you use any automated systems for your trading? If so, what kinds of success have you seen/do you have any recommendations?

    I’m looking forward to hearing some advice from a seasoned vet

  1. 1 Stocks on Sale » Stock & Bond Valuations Dislocated

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