Saturday, October 26, 2013

Conventional Wisdom

The "wisdom" for some time now, perhaps a year or so, has been to get out of the bond funds because interest rates were going up. Well, interest rates did go up. The ten year T rate went from 1.6% to almost 3%. But lately the long term interest rate has slid back to the 2.5 % range. Even as the stock market continues to melt up. As recent as Sept. 5th the rate was at 2.90%.

Time and again in the markets I see shifts in what individual markets do in direct contradiction to the "wisdom" that is put forth in most of the financial journals and on the electronic media. Until a catharsis occurs and the wisdom changes suddenly.

Right now the wisdom is that the stock market is the place to be. This has been a terrific year and has surprised many with the strong and resilient moves higher. Which seems to be based on an expectation of continued easy money from the U.S. Federal Reserve. The worse the unemployment rate, the higher the stock market.

But a strange thing is going on in the bond market. It is going up in price at the long end. Interest rates are declining.

I thought inflation was just around the corner. The industrial metals have been acting strong recently. At least they seem to have broken some long downtrends. Will it prove to be just shorts covering, temporarily?

The reason some will give is that Janet Yellen has been tapped to be the new head of the Fed. And she supposedly has a rep for being a dove towards inflation and interest rates. Perhaps. Usually the macro-economy rules the interest rate markets.

The recent strength in the long bond may prove to be short covering there.....

The reason I am pursuing this line of thought is the pattern that prices have formed in the Pimco Real Return Fund.

I see an inverse/ upside down head and shoulder pattern. A pattern sometimes the sign of a bottom. but in this instance a very weak right shoulder. As if the normal sentiment that makes such a price pattern is abbreviated and the market is taking a hurried shortcut to the upside.

I have regained a heightened sense of risk in stocks.


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