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posted on 26 November 2016

I'm Calling It - The Bond Market Bull Is Over

by Staff Reports Money Morning, Money Morning

Money Morning Article of the Week

-- this post authored by D.R. Barton Jr.

When I was growing up, a trillion dollars was a lot of money. Maybe that's why I think the full-on rout in the bond market, which has shed as much money since the election, is historically significant.

Bonds are caught in nothing less than a textbook "perfect storm," which I think heralds the bitter end of a secular, decades-long bull market.

That's critical for bonds and bondholders, of course, but it's important for the stock market, as well.

Let's take a look at this chart and I'll show you why…

Bonds Couldn't Resist These Forces

bond market

The macro "ingredients" for the rout I mentioned are…

  • The potential for accelerating inflation due to the aggressive economic stimulus plans of the Republican-controlled White House and Congress are being quickly priced into the bond market. All other things being equal, as the rate of inflation goes up, so do bond yields.

  • Money flowing out of the bond market has an attractive alternative in a stock market where traders and investors are optimistic that the regulatory environment and other factors will be pro-business. Remember, money goes where it's treated best. If there were no perceived economic gain for leaving bonds, the money would just trickle out. But the stock market looks positively irresistible by comparison, so it's the new home of $8.2 billion that were in bonds just about a week ago.

  • What's more, the probability for a Fed interest rate hike in December is approaching a statistical near-certainty. A few weeks ago, before the November Federal Open Market Committee (FOMC or "The Fed") meeting, I showed a chart from the Chicago Mercantile Exchange (part of the largest futures exchange in the world) that gave a 7.3% chance for rate increase in November and another chart that showed a 63.6% chance for a rate hike in December. As I mentioned, that December number has jumped up into "near-certainty" range. Let's take a look:

bond market

What these three factors add up to is a global bond meltdown.

I believe we are entering a period during which bond prices could go down for years - and maybe longer.

My Stealth Profits Trader readers just took in a quick 30% on our ProShares UltraShort Lehman 20+ Year ETF (NYSE Arca: TBT) trade. I don't see that trade turning unprofitable anytime soon, even if we do see some bond price pops in the near future.

Stocks, of course, are a different story…

Shares Should See Upside for the Foreseeable Future

Stocks continue to hold the ground they gained in the post-election "Trump Bump," and then some.

The Dow Jones Industrial Average made another new all-time high on Monday and has since entered a classic consolidation pattern that is easy to see on the chart:

bond market

The Russell 2000 small-cap index is now the strongest of the four major indexes, as it has made three all-time highs this week. The S&P 500 and the tech-heavy Nasdaq have also played "catch-up" this week.

Taken together, this collective price movement indicates that the bullish pattern we see on the Dow chart above should resolve by breaking to the upside. This is also consistent with the seasonal trends that show equities are usually strong into year-end.

I don't see much happening to change that, so I'm going to trade accordingly.

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