Earlier this spring, with markets on quite a bullish tear, many market pundits were calling for a bubble in the bond market. Equities were sharply on the rise, inflation was creeping higher, and the dollar was retreating – a perfect recipe for a bear market in bonds, all courtesy of Ben Bernanke's second round of quantitative easing. Since late March, however, the landscape has changed dramatically.
Markets have since been showing signs of DEFLATION, which is a dirty word to both economists and traders. The CRB commodity index is devised by taking a basket of commodities and compiling an index price for all of these. As you can see below, commodities have been in freefall with the dollar moving dramatically higher amid euro weakness. Commodities typically lead the move lower, and this was definitely the case with the CRB.
As a result of equity weakness and dollar strength, bonds have skyrocketed. Since the herd was in the bearish bond camp, they have had their faces ripped off. However, when I see a chart similar to the one below, warnings instantly go off in my head. Nothing -- no stock, bond, commodity, or currency -- is meant to go parabolic like the move we've seen over the past two days. This is a sign of extreme fear amid equity markets. Pundits who were calling for a bond bubble with the iShares Barclays 20+ Yr. Treasury Bond ETF (TLT) at 110 are now buying bonds hand over fist. To me, this is the beginning of something very big. It is tough to call a top in something that is moving as dramatically as TLT has, but a continued parabolic move amid heavy volume will set up a juicy entry for a short position in the very near future. Until then, don't attempt to call a top, but rather wait patiently for signs of bond weakness (and equity strength) to get involved.
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