Posted by: stockscooter | May 28, 2012

Fifth of a Fifth

The week of April 13th shows a gap down on the 30 year bond yield, which broke the highest green trend line (after point C).  Usually that will invoke massive short-covering on price, which it looks like it did.  It was surprising because a bottom in October last year was quite the possibility.  However, the new count shows yet another down leg, breaking past the yellow support line area.  When will it end?  I don’t know.  This 30+ year bear market in yields continues.  It looks like a 5th of a 5th of a 5th of a 5th of a 5th of a 5th………of a 5th.  The never ending e-wave impulse!

It reenforces something I was saying back in  2006-2009, as I was a Bond Trader for a large national B/D.  Clients would call looking to buy bonds, yet wouldn’t go long-term because they expected rates to rise.  I would tell them that after such a large decline in rates, for such a long period of time, rates usually don’t pop-up in a V formation off the bottom.  I told them, for the entire length of my employment (3 1/2 years), that it would probably take at least 5 years for rates to trade in a sideways channel and show a double bottom, before rates would rise significantly.  Now here we are, about 5 years since I started that opinion.  We have since made a hard bottom in 2008 and it seems the second double bottom is forming in an extended 5th wave.  And it doesn’t seem to be over, yet. However, the ice is melting and the season is upon us, so expect a shift in climate at some point.

The recent strength in the dollar, and the weakness in the commodity complex and high yield market, seems to support more slow down in economic growth.  At some point, disinflation leads to outright deflation.  Can the economy steer clear of this with QE3?  I don’t think so, and the bond  market seems to be confirming this opinion, for now.


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