The bond market has been neglected – but not for much longer

The bond markets have been receiving a little more than their usual non-attention recently. Most traders/investors ignore them and the vast majority of MSM financial coverage is still directed at shares. After all, shares are sexier and bonds are frankly pretty boring.

The usually totally neglected UK Gilts is a case in point when they grabbed headlines recently over the ‘mini-budget’ debacle. But with inflation at multi-decade highs, bonds are now starting to get the attention they deserve. I encourage all investors/traders to pay more attention to them – especially the sovereigns. They will play a crucial role in the financial landscape in 2023.

One of my favourite markets to trade is the 30-yr T-Bond issued by the US Treasury. It is huge and very widely held especially by foreigners because of the tie-in to the almighty dollar. It also usually sports accurate tramlines, Fibs and Elliott wave counts. And it is at such a crucial point now.

I see recent Bloomberg headline: Citi Sees Family Offices Swarming Bond Market and Fuelling Rally. Bonds Deserve Immediate Attention As A’ Mild’ Recession Is Expected Next Year.

When I see ‘bullish’ headlines like that with definitive ‘buy’ advice, I just know it is about the time to look to short them – and to pencil in not a mild recession but a very hard one. For a died-in-the-wool contrarian, that is a pretty good signal.

Many will question my sanity that such a seemingly simple-minded conclusion can be drawn from just that headline. After all, every day there are many divergent headlines. Not to mention that there is an army of hugely-paid ‘fixed interest’ analysts who pore over the intimate details of the largest market on the globe – corporate bonds.

Many focus on the Fed and its streaming pile of economic data (some freely available from FRED the St Louis bank). Others study the huge corporate market. And there are the math specialists who conjure up all kinds of derivative functions that more often baffle ’em with science, That is the intellectual approach.

For me, I do not need to understand the intricate workings of the bond market. In fact, as with most things in life, the more you delve into a subject, the less you understand of it. And the further away you are from being able to ‘read’ the market which is essential for price forecasting.

I prefer to keep things simple with just one or two main market influences in my head.

After all, I hope I speak for all traders in saying that we are in it to make profits, not so much to prove how clever we are.

Oh, and one main reason I scan the MSM headlines for contrarian clues is that by the time a writer has acknowledged a trend, it must be ‘obvious’ to his/her readers – and hence near a top/bottom.

End of year prophesies

At this time of the year it is customary for pundits to offer their forecasts for the New Year. And reviewing such prognostications can be very revealing. One of the first out of the blocks is a Bloomberg survey of the big US fund managers that has 70% of them calling for a positive 2023 with an average gain in equities of 10%. This after a more than 20% loss in the S&P this year.

One pundit says: “Even though we might face a recession and falling profits, we have already discounted part of it in 2022,” said the chief investment officer at Swedbank Robur. “We will have better visibility coming into 2023 and this will hopefully help markets.”

This very positive outlook fits perfectly with the theme that a second wave bear market rally produces bullish sentiment that matches or even exceeds that at the ATH a year ago. Note that such bullish sentiments failed to appear at the mid-October lows! And during this second wave rally, the ‘bad’ economic news – of which we are seeing a plethora – has been seen as ‘good’ for shares as it is seen to limit rate hikes by the Fed.

But that argument can betaken only so far. The obvious conclusion is that if that is the case, recessions and then economic depressions would be great for shares! As my maths teacher used to say: Reductio ad absurdum, my boy!

The other corollary is that ‘good’ news should be bad for shares. So how can rising profits be bad for shares? Hmm.

No, the real world of cost-of- living crises, still high energy prices, and high mortgage rates is impinging on the real economy with real estate prices now falling as is consumer spending.

And another bullish headline; Now is the time for investors to accept short term pain for long term gain. He states: Investors who buy shares today, however, must accept that they could experience acute short-term pain in return for the chance of big long-term gains. In practice, this means the value of their recent purchases could fall sharply before they rebound to generate significant profits.

But what if they don’t rebound in a decent time frame? What if they fall another 20%. then 30% and then 50% or even more? Most of us will not tolerate such major losses even if they are ‘on paper’. A paper loss is a real loss. Period.

If that author expects purchases today could fall sharply, why not wait for the fall and buy much cheaper? This is idiotic investment advice. He falls into the trap that you must always be invested in shares – a holdover from the ‘good old days’ when shares always went up and anyone holding cash was a loser. But cash is now a credible alternative with decent rates available on a par with some stock dividends.

For now, investors are laser-focused on the Fed’s pivot intentions and Wednesday’s statement will be closely parsed. But in reality, we will have high rates for some time and will continue to make a lot of the speculative loans taken out at zero rates highly vulnerable to default. Highly indebted companies that are seeing pressure on their cash flow are especially at risk.

Incidentally, I see that in the US, a median priced home bought by a family on the median income would need to devote about half of that income to mortgage payments. Affordability levels already low have now plunged to its lowest levels ever. This unsustainable situation has to give – and it will not be rocketing incomes that will come to the rescue.

Stocks made small second wave bounces last week

The US indexes bounced off major lows on Tuesday with the Dow up by 600 pips by Friday morning but when the CPI data emerged hotter than expected, it fell. And that little bounce put in another small second wave which will lead to another strong third wave down. Here it is on the small cap Russell 2000

Last week’s wave 2 is not marked (it is too small on this scale) but it is a crucial part of the EW picture since it can now be the first corrective wave in what should turn out to be a large five down with the small third wave now starting. Look out below!

Crude oil in decline – is this a bear market?

Consumers and industry have been cutting back on their use and prices have fallen in recent months. In the futures markets prices for near term delivery have fallen under that for deliveries next year – a sure sign of a glut. As is the build-up of stocks above ground. But will this continue for much longer or will OPEC step up their planned production cut-backs. After all, OPEC has become the swing producer again and has the power to affect prices.

Technically, crude is at a crossroads. As the economy weakens, crude prices can be expected to be under pressure which is what we have been seeing. But here is a valid bullish scenario on the daily

The ATH in March at $128 lead to the current correction in what looks like a three-wave A-B-C. Prices have lost 45% so far.

Within the ‘C’ wave I can count five waves in progress. I also have a tramline pair working with slight overshoots on the lower tramline in wave 3 and on the current wave 5. With a mom div and an RSI hit on the lower 30 ‘oversold’ bound, odds are increasing that we are at or very near the termination of the major correction and a rapid rally phase appears much more likely.

The waters have been muddied very recently by the imposition of EU price caps on Russian crude. That is intended to put a ceiling on oil prices for the EU and help reduce inflation. If the politicians believe that all other non-aligned nations such as India and China will sign up to this, I would like to have what they’re smoking.

This ‘must be seen to be doing something to hurt Russia’ policy is doomed from the start and all it will do is hurt EU consumers making fuel this winter more scarce/expensive and let Russia export to others as much as is demanded on the usual terms.

I am seeing major additional outbreaks of stupidity in politics currently which simply validates the maxim that the road to hell is paved with good intentions (see also my comments on Net Zero).

I expect to see oil prices rally into the New Year.