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TAKING ADVANTAGE OF WEAKNESS IN BONDS

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The recent capital market turmoil across the oceans and through all asset classes be it bonds or stocks or gold, has exacerbated certain risk-reward relationships between these asset classes as the "carry trade" is being unwound. And while these relationships may become even "more skewed" in the weeks and months ahead - we believe the time is approaching whereby asset allocators will begin to favor bonds over US stocks. Increasingly, this relative valuation will come to bear upon investment gains...and must be exploited as the next larger picture trade for the coming year.

That said, our proxy for this relationship is TLT vs. SPY (Lehman 20+ yr. Bond Fund vs. the S&P 500 Index), which allows us to exploit relative gains using equities only. Since March-2003, prices moved lower in a very distinct downtrend - forming a declining wedge pattern that shows each successive low is losing momentum. And while no major levels of resistance have yet been violated - the pattern appears ready to conclude is slide and resume its upward trajectory. Thus, we would become interested in "speculatively" purchasing the ratio upon a move above the .75 to .77 level from its current .74 trough, which may develop in the days or weeks ahead given the negative divergence forming between prices and the stochastic.

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Chip Anderson
About the author: is the founder and president of StockCharts.com. He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of StockCharts.com into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at StockCharts.com, and provides updates about new features or additions to the site. Learn More
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