Wednesday, June 10, 2015

Falling bonds and urban myths:

I note the iShares Barclays 20+ Yr Treas.Bond ETF (TLT) at $115.73 is down about 20 per cent from the January 2015 price peak of $138.50 and the yield on the 10-yr T-Note has jumped from 1.65% to 2.47%. Remember rising bond yields mean falling bond prices – and that according to an urban myth – is bad for stocks.

Q: So how come over the same time period the S&P500 is up about 3 per cent?

A: The equity market is telling us that interest rates are rising because the global economy is improving – and we are past the deflation fear.

To repeat – I think we have the Sell-of-a-Generation on bonds – the last time this happened was back in late 1941 – the stock market bottomed a few months later and ran non-stop through to the mid 1960’s. A look at the NYSE new 52-week high list at the close June 5, 2015 displayed about 60 names – over half being components of the financial sector and we all know that the financial sector always leads bull and bear cycles
Our chart – displays a bullish message two financial ETFs – the SPDR (KRE) Regional  Banking sector and the TSX listed BMO equal weight US bank ETF (ZUB) – both printing new 52-week highs. Note both are still trading above a rising 50-day MA – so I still don’t think we sell in May and run away.

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