Trader’s Narrative

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.

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.