Missed the Equity Rally? How About Bonds…
by Jes Black
November 7/04
If there was any doubt that the bulls were in charge, Friday’s payrolls should suffice. The S&P 500 has rallied for nine consecutive days reaching a new 2 1/2 year high on Friday. What started as a short-covering rally has turned into a full-blown bull market rally that should last for another four weeks or so, carrying the S&P 500 to 1245 before marking a lasting top. For bears that may have missed the equity rally, the best possible alternative is now in bonds.
Subscribers know that over the past six weeks we have felt like “The Boy Who Cried Wolf” on our bond market stance. Even as the market turned against us we stated unequivocally, “If bulls are going to rally the equity market, bonds should fall hard and fast. So we are holding our shorts” Our rational was that both US stocks and bonds were overvalued and one (if not both) of these markets was wrong.
As it would happen we covered our US equity shorts and went long the market back on October 26 (following the break above downtrend resistance in the S&P500). At this point we began to fear that the market would not fall hard ahead of the election, as we had initially forecasted. This was a strategic move on our part but not a capitulation. Our core position since late August and early September has been long Taiwan, Japan, and Australia. As a group these positions are up 17%, 2%, and 16% respectively since we first highlighted them for our subscribers.
Yet, to illustrate just how wrong we felt the bond market was we showed
a graph of the CRB to Bond ratio and US interest rates. We said that not
only had this ratio broken out of its 10-year channel resistance but that
it was resting on support which now consisted of the same former resistance
line and the 50% retracement of the decline from 1994 to 2001. Technically,
this is hugely significant and should lead to more "reflation"
in the coming weeks to months.
Missed the Equity Rally? How About Bonds…
If there was any doubt that the bulls were in charge, Friday’s payrolls should suffice. The S&P 500 has rallied for nine consecutive days reaching a new 2 1/2 year high on Friday. What started as a short-covering rally has turned into a full-blown bull market rally that should last for another four weeks or so, carrying the S&P 500 to 1245 before marking a lasting top. For bears that may have missed the equity rally, the best possible alternative is now in bonds.
Subscribers know that over the past six weeks we have felt like “The Boy Who Cried Wolf” on our bond market stance. Even as the market turned against us we stated unequivocally, “If bulls are going to rally the equity market, bonds should fall hard and fast. So we are holding our shorts” Our rational was that both US stocks and bonds were overvalued and one (if not both) of these markets was wrong.
As it would happen we covered our US equity shorts and went long the market back on October 26 (following the break above downtrend resistance in the S&P500). At this point we began to fear that the market would not fall hard ahead of the election, as we had initially forecasted. This was a strategic move on our part but not a capitulation. Our core position since late August and early September has been long Taiwan, Japan, and Australia. As a group these positions are up 17%, 2%, and 16% respectively since we first highlighted them for our subscribers.
Yet, to illustrate just how wrong we felt the bond market was we showed a graph of the CRB to Bond ratio and US interest rates. We said that not only had this ratio broken out of its 10-year channel resistance but that it was resting on support which now consisted of the same former resistance line and the 50% retracement of the decline from 1994 to 2001. Technically, this is hugely significant and should lead to more "reflation" in the coming weeks to months.
Moreover, the relationship between yields and the CRB to Bond ratio broke
down severely in 2002 (blue box below) as Asian central bank intervention
to support US treasuries via the dollar created a massive divergence in
what is usually a close relationship. Looking at this chart we said that
if the CRB to Bond ratio was trading above its decade long resistance
line, the 10-year yield should be at or near the same relative level.
As you can see, this would imply a 10-year note yield around 6%, well
above the artifically low 4%.
Now that we believe US equity markets will rally into the New Year we
are confident the bond market will get hit “hard and fast.”
On Friday we were paid our due with a key break of trendline support in
the five, ten and thirty year bonds. If stocks rally to new multi-year
highs, bond prices should at the very least retest their June lows. For
bond bears this marks a prodigious opportunity.
Jes Black
Recent Testimonial for FX Money Trends: “I find FX Money Trends’
work extremely helpful. As a macro hedge fund manager I base my success
on ideas generated both internally and through external research services:
FX Money Trends and its founder Jes Black constantly provide ideas which
are based both on very clever fundamental and technical analysis and research.
FX Money Trend’s intellectual independence makes their ideas precious,
never obvious nor “late.”
Francesco Clarelli, Italy.
Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped MG Financial Group launch Forexnews.com. Afterwards he went on to found FX Money Trends, a research firm catering to professional traders.
Mr. Black holds a degree in economics from the University of Kansas and
an MBA from the ESC in France. His market commentary is often featured
in the Wall Street Journal, Financial Times and Reuters. He has also written
numerous strategy pieces for Futures magazine. To find out more about
the fund’s research letter visit www.fxmoneytrends.com. Qualified
prospective investors can find out more about Black Flag Capital Partners
by e-mailing info@blackflagfund.com
Jes Black
FX Money Trends, LLC
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Hoboken, NJ 07030
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