Tuesday, May 3, 2011

The Question Investors Should Be Pondering

It looks like we are back to that risk on - risk off market.  Risk assets, like equities and commodities, are down while bonds are trading slightly higher today.  While this is really nothing new, the question investors should be asking themselves if today's action is a prelude to a more significant turning point.  In other words, will bonds catch a bid while riskier assets take a breather. 

Betting against equities and risk assets has not been a particularly kind trade, but I believe investors have become extremely complacent as they have become of one mind set and that is that the stock market can only go up.  Investors are betting on a sure thing (higher equity prices) and well, there is never a sure thing when it comes to the market.  

Technically, long term treasury bonds have firmed up over the past several weeks and are catching a modest bid.  They clearly aren't loved and uber -investor, Bill Gross of PIMCO Funds, isn't too fond either.  (You can read Gross's latest missive by clicking here.)  Nonetheless, my intermarket fundamental model remains bullish on bonds for the 8th consecutive week.   Technicals and fundamentals are pointing to higher bond prices.

We have seen today's mini market meltdown (yes, a less than 1% drop is a now a meltdown) many times over the last year.  The dip was quickly bought in most cases.  With my bond model positive and the technicals firmer, I have to wonder will we finally see a rotation out of risk assets and into Treasury bonds.  In other words, is the "risk on" trade ending?

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