January 10, 2017
The bond market is the biggest market in the world, so it will always have very large influences on all other markets, but the correlations change over time. Sometimes bond prices and the stock market rally together, other times they move opposite. The stock market can “ignore” bonds for awhile, but eventually it won’t if the move in yields is big enough. And that is true in either direction – up or down in bonds – and stocks also can have some influence on bond prices, as this is all interrelated to some extent. Yield movements will also have an influence on other markets. It’s not likely to last, but currently bonds and gold are highly correlated. And while anecdotally, the sentiment on gold has become less bearish on the recent rally, there are still plenty of bears – “Investors are dumping gold“. While futures speculators continued to reduce their net long position. And the positioning in Treasuries continues to get even more extreme, as the 10 year futures speculative short position hit another record high this past reporting week, adding onto the previous record.
The 30 year US Treasury is in a major bear market, but no market moves in a linear direction every month. For those people who own alot of bonds, this price rally can be a chance to reduce positions. Or it can also be used for lower mortgage rates, before much, much higher rates come into play over the years, so take advantage of it. But last month the selling, the technical situation, and the extreme bearishness in bonds provided a trading opportunity. One month ago, my belief was a counter trend rally in bond prices was setting up, as there was a fairly powerful selling climax and I bought the TLT ETF as a position trade, as laid out here and here. Of course even in a position trade (this certainly isn’t an investment), the rally in bond prices has allowed an opportunity to take partial profits, and reduce risk – an important part of my approach. I annotated the TLT selling climax in the post from last month – the original chart is with the December post. The rally in bond prices, or the drop in yields has helped gold. This correlation won’t always continue, but it’s intact presently, which is one reason why I’ve kept pointing out the current bond bearishness. Bonds are a massive market, which is why the bond market implosion is going to be a slow process, with lots of countertrend rallies. The move higher in yields will likely get aggressive again later in 2017 (3.05% will act like a magnet), especially in the second half, and that’s when the higher yields will begin being a help to the PMs.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day. Scott returned to markets over fifteen years ago where he continues as an independent trader.