Here is my article in full for SFO Magazine last week:
Friday, October 28, 2011
By J.C. Parets
Less than a month ago, the bears were ruling the streets.
The AAII sentiment surveys had the highest percentage of bears among financial advisors since March of 2009. As far as individual investors go, we saw the least amount of bulls since August of 2010. Both of those dates were important market lows. Sure enough, so was October 2011.
With just a couple of days left, the S&P 500 is on pace for the largest monthly gain since October of 1974. On Thursday the large-cap index soared 3% bringing the monthly total up to about a 13% gain for the month.
You can read the headlines and come up with a bunch of reasons why this month has been so spectacular for the bulls.
Forget all that, we’ll look at the technicals. Aside from the extreme sentiment conditions entering the month, the Treasury bond market has been absolutely decimated. They can’t sell them fast enough. Money flowed into the “safe haven” of U.S. government debt during the market sell-off this summer. But since the lows in stocks were put in earlier this month, Treasury bonds are being sold like Dutch tulips in 1637.
Going forward we want to keep a close eye on what the bond market is doing. I cannot stress enough that if money keeps pouring out of this asset class, it has to go somewhere else. Money doesn’t just disappear, it is reallocated.
Stocks and commodities benefit greatly from this redistribution of funds. The iShares Barclays 20+ Year Treasury Bond Fund ($TLT) broke down hard yesterday as the stock market exploded. Its shorter term cousin —iShares Barclays 7-10 Year Treasury Bond Fund ($IEF) did the exact same thing, gapping down to levels not seen since early August.
I think that as this asset rotation continues, the stock market will benefit, but I am expecting a sharp retracement in both coming very soon. At some point next week I would imagine that we see some sort of Treasury rally that causes a pretty severe selloff in stocks. We are still in a choppy volatile environment so market participants have to be proactive. Pairs trades are very effective here. Money can be made on longs as well as shorts. Don’t be afraid to play both sides.