Market Comments and Bonds Revisited - Morning 3/2/2011

Last night, the Dow Industrials Index was flat, +0.02%. The Dow Transports were down a whopping -1.94%. That continues the disconnect between the Industrials and the Transports. Not a good sign going forward (thanks Julia).

The SPX was down modestly, -0.27% and the Russell 2000, -0.34%.

The market on the basis of those figures was not robust.

Enough of the day-to-day movements.

I wanted this morning to revisit my comments on Bonds which I put up yesterday morning. I noted:

The Price of Bonds normally are in tandem with the Price of Stocks. They've been out of kilter for many months. Something's wrong - Bonds or Stocks? The Bonds players are usually savvier than the Stock players. The Bonds players work on economic fundamentals which determine direction - eventually. But the two Asset classes can diverge for long periods of time.

I've been doing some more digging on the relationship between Bonds and Stocks. And I came across some work done by the excellent Kevin Klombies. Klombies is a Canadian expert on inter-market analysis (and someone for whom I have the highest regard). His work tends to be long-range in nature - often looking two years down the track. Not a great help for right now - but great background material.

Anyway - I came on some work by him where he's noted that divergences from the usual positive relationship between bonds and stock prices can be explained by the relationship between bonds and the CRB Index. (Stay with me on this.) While increases in the CRB Index outstrip falls in the price of Bonds, the American market will continue to rise.

Hence - this morning's chart. It's a ratio chart of the price of 30-Year Bonds to the CRB Index. And it throws up some fascinating insights.

First, this ratio chart bottomed before the general market bottomed at the end of the GFC (2008/2009). There was also a big negative divergence on the ratio chart between Jan.2010 and Apr.2010 giving warning of the big fall into May 2010.

So - as an early warning system, the ratio chart Bonds/CRB seems to have value.

And that brings us to today's chart (above). No early warning yet on the chart yet - but the Indicators are all setting off alarm bells.

As I've noted before (often) a "top" in a market is not an event - it's a process. It seems to me that we're in that process now. I've been banging on about this for some time now.

I'll be watching this Bonds/CRB chart with great interest "going forward" - perhaps to give an early warning of a fall in the American market. The Indicators are already doing that.

Good luck

Red