Ahhh, questions, questions and nobody really knows the answers!
When the current picture gets cloudy, when the emotions run hot, I always find it a good exercise to step back and to refocus on the Big Picture.
• From May 2005 to May 2006 the HUI rose by 140% and into over-bought territory (not shown in chart).
• Since May 2006 the HUI has been in correction mode, working itself into an oversold position (not shown).
• The correction low of 270 was established in June ’06 and retested successfully in September.
Whilst the HUI was undergoing its exhilarating rally, 10-year bonds were falling like a rock (bottom of chart). This inverse correlation is highlighted in the green rectangle. The prevailing mood at the time was one of increased inflationary expectations. A good trade was to sell bonds and buy Gold.
How perspectives have changed
Since July of this year, 10-Year US Treasuries have been rallying hard. A lot of market commentators (including myself) said this was a sign of a Global Slowdown.
But a longer dated chart shows a completely different story:
• 10-Year Treasuries made an important top in February 2004 and headed lower ever since.
• Since July 2005, 10-Year Treasuries have been in a relentless down trend.
• At the beginning of July 2006 Treasuries were oversold and logically deserved to rally.
• The subsequent rally top in September ’06 looks to me like a test of long-term resistance at 108 (blue line).
• As 10-year treasuries rallied, battered Homebuilding stocks like Centex (CTX) (bottom of chart) stabilized and staged minor rallies (green rectangle).
Here’s the Point:
From a longer term perspective the latest rally in 10-Yr Treasuries does not look like another major bull up-leg to me.
From a technical perspective, probabilities favor Bonds (and Centex) to continue their trend downwards. It’s probably too early to know for certain if September will be the correction top. I would expect at least one more crack at 108 (with MACD and RSI divergences developing) before Bonds begin their next leg down.
Timing? Ahh, timing.
In August, I wrote an article titled Higher Oil Means Less Money To Spend in which I highlighted the fact that the stock market was tracking the Bond market with a one month time lag. The strong correlation remains in force and, if it continues, points to a late October, early November top in the Dow Industrials.
Bearing in mind the 1 month time lag correlation:
• November will be a correction month in the stock market and bonds will complete their double top at 108.
• The Dow will rally in December giving us our year end Santa Claus Rally.
Well if Bonds head South into their next down leg, which I expect they will, Stock Market Bears and Gold Bulls may finally have cause to celebrate on the same day.