Guestpost from Yves Lamoureux:
We could not have been more ultra bullish on stocks since the start of the year. We are now concerned, as we had stated, of a fast unwind of leveraged positions. We have correctly called the bond and gold crash. That relationship is clearly evident.
Leverage worked perfectly when rates "WERE" low! They are not anymore. A quick survey would have yield getting to be twice of what they were at the lows. We had clearly defined our views of front running the bond market the other way around this time and it has avoided us this really big break.
What concerns investors avoiding stocks should have is simple. They are attempting to flee a stock correction by having invested in various bond investments. From high yields to corporates, everyone seemed to have the perfect solution to offer these stock refugees.
It will not have the desired effect. These investments will show the same correlation to the stock market. In a market correction they will feel a double blow. One from rising interest. The other from an economic slowdown.
On this subject, we have written extensively at the start of the year. We feel strongly about dividend stocks being in a bubble as much as bonds are. You can download our text dated December 19th that talks about these issues.
We have in our model a first clear danger sign of an economic slowdown in 2014. It can not surprise anyone that the back up in rates will filter itself through the economy and the housing market. This has been a recurring theme on our part.
The breakout of oil out of a triangle is an ominous sign as well. One that surprises us given the weakness in macro economic indicators. We are observers only and do not carry any oil positions. We certainly feel quite uncomfortable about a market that behaves outside of its normal supply demand equation.
Most participants have been taken aback by the fast rate rise. We certainly do not feel that the selling process is over.
When the quarter ends people receiving their statements will react to the drop. The slow crowd has yet to react!
The latest selling could in fact represents just the tip of the iceberg.
We view the Taper Talk as a huge monetary policy blunder. It has given the leveraged crowds a reason to rush for the exit.
Our beliefs still hold that rates were held too low for too long. It has given way to bizarre investment behaviour.
It will be resolved eventually as an implosion of cataclysmic proportions. More on this later.
For now, we have decidedly pulled in our horns. The fast drop in value of bonds in effect counters a lot of the quantitative easing. A great win for bond vigilantes who apparently were non existent anymore and a resounding echo all the way to the land of the rising sun.
We will carry on with our own attacks shortly as we pass on to our subscribers our next moves. The target on the FTSE that we had set was reached perfectly. From the top, the drop appears to be in a five wave sequence. The recent rally a corrective bounce. It is quite worrisome to think about the next wave.
We are enthusiastic about gold forming a bottom in the near future. Our latest missive describes what we look for in creating a bottom. We also show why people have generally been wrong on evaluating gold metrics.
The second half looks promising but shows up also with plenty of potential hazards.