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Indicator at 0.2% Offers Clues to Direction of Bonds, Stocks and Commodities


If the data tells you to sell bonds, where should the money go?


March 31, 1986
Bond yields: The bottom was 3.5 months later -4.3%. Bond yields went up 37% in less than 19 months.
Stocks: The bottom was 0.25 months later -4.2%. Stocks went up 41% in less than 15 months.
Commodities: The bottom was 3.5 months later-5%. Commodities went up 31% in less than 27 months.

December 16, 2008
Bond yields: The bottom was 0.06 months later -11.1%. Bond yields went up 68% in less than 16 months.
Stocks: The bottom was 2.9 months later -26.8%. Stocks went up 40% in less than 16.5 months.
Commodities: The bottom was 3.5 months later -3.3%. Commodities went up 42% in less than 13 months.

Bond yields, stocks and commodities all went up at least 31%.

Since we have a sample size of only two, let's lower the standards a bit and add a third instance.

November 3, 1982
Besides the days surrounding the aforementioned groups, the next most extreme reading was November 3, 1982. The following chart is the same as before, except I've zoomed in to 1982 and added a new vertical blue line at the very, very far left of the page (almost touching the black line).

Click to enlarge

Bond yields: The bottom was 0.5 months later -3.6%. Bond yields went up 30% in 19 months.
Stocks: The bottom was 0.7 months later -6.9%. Stocks went up 20% in less than 12 months.
Commodities: No downside. Commodities went up 23% over the next 17 months.

As you can see, the moves were not as dramatic as the other instances. This is to be expected as the indicator is not as extreme as it is now. However, bond yields, stocks and commodities all went up over 20% over the next 12-19 months.

Since all three asset classes in all three instances bottomed within 3.5 months, this indicator suggests bonds yields, stocks and commodities will bottom before the end of the first quarter in 2012.

These charts suggest that one should sell bonds. So where do you put the money? This indicator suggests stocks or commodities. Which one?

It so happens that I have conveniently already addressed this question in an article called Why Stocks Will Annihilate Commodities. To be frank, the indicator in this article is diametrically opposed to my previous content which has been quite bearish on commodities. In the interest of fair and balanced reporting, I present both sides of the commodity case and leave it to the reader to decide.

On the other hand, there are no mixed signals for the long bond. And there are a lot of positives for stocks. The earnings yield for the stock market is 7.17%. The yield for the 30-year bond is 2.91%. The probability of stocks outperforming 30-year Treasury Bonds over the next 30 years is extremely high. This indicator suggests that stocks will significantly outperform long term treasuries over the next 15-19 months as well.

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No positions in stocks mentioned.
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