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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (37221)	1/11/2000 5:07:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

The Tail is Wagging the Dog. And the Dog is Loving it. syharding.com

To: Crimson Ghost who wrote (37221)	1/11/2000 5:28:00 PM
From: pater tenebrarum	Read Replies (2) \| Respond to of 99985

George, there's no denying that the stock market has decoupled from the bond market at the stated time (July '98), and that nothing has changed since. i concede that some of the short covering rallies in the bond were used as an 'excuse' to rally stocks, but by and large the stock market has ignored the upward trajectory in yields to the extent that it merits more than the standard 'higher yields are bad for stocks' response. obviously if that were unequivocally true, the Nasdaq should not be where it is now. let's make one thing clear: i have long ago stated my expectation that at some point, yields will be high enough to provoke asset reallocation from stocks into bonds. obviously, this hasn't happened yet, and one must therefore try and explain why not. the explanation can be found in the Fed's balance sheet. the Fed has become a huge buyer of US government debt in an attempt to avoid a total collapse of the bond market which would otherwise have occurred. the unprecedented winning streak of the stock market in recent years, and especially last year, has led to asset re-allocation the other way around: out of bonds, and into stocks, preferably stocks with no earnings at that. the Fed, by trying to ensure an orderly decline in the bond market, has inadvertently added more fuel to the stock market bubble, as the reserves added by monetizing more and more of the USG debt promptly were loaned out to buy even more stocks. it is no coincidence that the biggest annual expansion the Fed's balance sheet has ever seen has coincided with the worst year in the bond market ever, the biggest annual gain in the NAZ ever and the biggest expansion in margin debt ever. as to where i currently stand with regards to the bond market, i have been very consistent in calling for higher yields...but now the bearishness regarding bonds has become so thick, and finally bearish positions in the dedicated short bond Rydex funds so big, that i expect at the very least a short to intermediate term low to be put in place soon. i happen to think that it will coincide with more selling in equities, thus keeping the negative stock/bond correlation intact. the reason for this is that apart from the obvious fact that stocks are now priced for the here-after, the bullish consensus in the stock market has become incredibly high. it is extremely revealing that the initial swoon the market experienced in the new year did not elicit any feelings of fear or caution at all...if anything, people have become even bolder! the seasoned investors polled by AAII have always harbored a healthy degree of skepticism, throughout the long life of this bull market. to see them go completely overboard during the most volatile week in a long time and profess 75% bullishness is a remarkable development and imo a sign that the publics high expectations are close to meet with disappointment. regards, hb

To: Crimson Ghost who wrote (37221)	1/11/2000 9:02:00 PM
From: Jacob Snyder	Respond to of 99985

re: bonds vs. stocks: If I had posted, in October 1998, that in January 2000 the Nasdaq would be at 4000, such a post would have been greeted with gales of laughter. If, further, I had said that the long bond was going to be at 6.7%, everyone would have been rolling in the aisles. They would have said, "That's absurd. Calculate what PE you'd need to have, given reasonable earnings growth, to get to Nasdaq 4000 by 1/1/00, and the result is absurd. Further, if interest rates go sharply higher, PEs have to be hurt." There have been some brief periods, over the last 15 months, when it seemed that bonds and stocks were resuming their normal relationship. A few days here, a few days there. It didn't last. I think what's happening here is exactly what happened in 1987. Then, interests rates rose and rose, and so did stocks. It was an anomaly, and it was corrected. The current anomaly, I think, still has a bit to run. Remember the reaction to the Lucent warning/employment news? Irrational exuberance still dominates the market.