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Market Overview 6-26-16 (video)

In studying the charts this weekend, I noticed what appears to be an unusual alignment between the typical "risk-on" & "risk-off" asset classes. While the case for the next major leg down in US stocks that I have been making recently was considerably strengthened on Friday, I find it a bit unusual to see what appears to be a pretty solid technical case for a reversal (drop) in the traditional flight-to-safety assets & sectors such as U.S. Treasury bonds, utility stocks & consumer staples at the same time. Traditionally, those 'risk-off' securities have been the beneficiaries of market volatility as money moves out of risky assets such as growth stocks & into these perceived safe-havens or, in the case of consumer staples & utility stocks, companies whose earnings are typically not impacted by a slowdown or contraction in the economy.

It is worth pointing out, however, that the two defensive sectors mentioned above; consumer staples & utilities, both peaked months after the broad market (S&P 500) so as with back then, the case might be made that a flight-to-safety rotation as already been made (completed) into those two sectors, which as in those previous bear markets, lead to excessive & unsustainable valuations. The more puzzling part to me is the fact that U.S. Treasury bonds look poised for a significant trend reversal (prices down, rates up), which would be quite unusual to see play out if U.S. stocks were to allow experience a substantial drop in the coming weeks to months. Then again, global financial markets have been plagued with distortions & unusual disconnects in recent years due to the excessive & unprecedented actions by the Fed & other global central banks so maybe a scenario of stock prices falling along with treasury prices could play out, not unlike the complete 180° reversal that took place between stock & commodity prices starting in mid-2011.

stocks vs. commodities 15 yr

stocks vs. commodities 15 yr

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Jun 26, 2016 8:13pm|Categories: Equity Market Analysis|Tags: , , , , , , , , , |4 Comments

4 Comments

  1. pkm48193 June 26, 2016 9:16 pm at 9:16 pm

    In normal markets, bonds – up, stocks -up; bonds -down, stocks – down. In manipulated markets (when money is being expanded at too fast a rate and the FED is blowing bubbles): risk-on, risk-off. Remember, the Fed can monetize the bond market to keep yields down. If they keep printing and if the Fed follows the EU’s purchasing of corporate bonds, real bonds yields will go even more negative, the dollar will decline and foreign bond holders will dump treasuries. The Chinese are already converting their foreign reserves into gold. We are approaching the end game. You are correct, we are probably beginning a secular bear market. People expect there will be European bank failures, Deutsche Bank, Credit Suisse, that will be blamed on Brexit, not the central banks.

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    • rsotc June 27, 2016 11:15 am at 11:15 am

      “People expect there will be European bank failures, Deutsche Bank, Credit Suisse, that will be blamed on Brexit, not the central banks.” … so very true & you make a lot of good points above. Thx for sharing your thoughts.

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  2. joefriday June 26, 2016 11:33 pm at 11:33 pm

    Randy.. I Agree. I am seeing the same thing..and why I am short Bonds.. It seems like there may be a new paradigm in play where all assets classes go down together… crazy but guess we are starting to the effects of an FED/ECB manipulated market.

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    • rsotc June 27, 2016 10:44 am at 10:44 am

      G-luck on those bond shorts. FWIW, probably best to focus those shorts on the low-grade (aka junk: JNK/HYG) & investment grade (LQD) corporate bonds vs. treasuries as they won’t see as much of a flight-to-safety bid if things start to get really ugly.

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