Buying Bonds As Bears Gain On Bulls

Buying Bonds As Bears Gain On Bulls

by Lance Robers, Clarity Financial

More Volatility – Still No Movement

Last week, I discussed the issue of “lot’s of volatility with little movement” stating:

“The last couple of weeks have experienced a sharp rise in price volatility. While stocks have vacillated in a very tight 1.5% trading range since the beginning of June, there has been little forward progress to speak of. However, notice that support at 2415 (50-dma) has remained solid as ‘robots’ continue to execute their program of ‘buying the dips.'” 

“This lack of progress keeps us ‘stuck’ with respect to portfolio positioning.”

I remain very cautious on the overall market, currently, and the deterioration is leadership remains concerning. However, the trend remains bullishly biased which keeps portfolios allocated on the long side for now. 

With that said, the recent “sideways” movement has NOT worked off the previous overbought condition of the market on an intermediate term basis as shown below.

As I have stated previously, the presence of the primary “sell signal” (signal 1) has suggested price weakness in the market would likely continue. However, the recent corrective action has now pushed the “secondary” signal towards initiation. Previously, the confluence of both intermediate-term “sell” signals have historically been in conjunction with deeper corrections in the market.

I am giving the market a bit of “room,” given the week was interrupted by a holiday which tends to let the “inmates run the asylum.” Next week will give us a better picture of the current risk/reward setup.

Despite the uptick in volatility last week, volatility remains suppressed at historically low levels. As shown in the chart below, the recent “back and forth” action has reduced the overbought condition of the market short-term with stocks testing the bullish uptrend. Furthermore, while the market is oversold on a “daily” basisversus “weekly” as noted above, the high-level of complacency DOES NOT align with the tradeable set ups noted previously by the vertical red dashed lines. 

Let me reiterate from last week:

“I continue to suggest a healthy regimen of risk management practices in portfolios by following some rather simple guidelines (the same ones that we followed to harvest profits recently as noted above.)

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against major market declines.
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.”

For now, as noted above, let’s wait until next week to see if the “bears” can continue to gain on the “bulls.”  If they do, we will then begin to evaluate models to reduce overweight positions, raise some additional “cash” and potentially begin to deploy some hedges.


Approaching A Bond Buying Opportunity

Last week, I discussed “why” interest rates can NOT much substantially higher from current levels. To wit:

“As I have discussed many times in the past, interest rates are a function of three primary factors: economic growth, wage growth, and inflation. The relationship can be clearly seen in the chart below by combining inflation, wages, and economic growth into a single composite for comparison purposes to the level of the 10-year Treasury rate.”

“As you can see, the level of interest rates is directly tied to the strength of economic growth and inflation.”

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