Professor Elam

Thursday Jan 14 2009

We put a longer 21 and 55 bar exponential moving average on
the bond chart. These MAs give infrequent but accurate changes in direction to
a market. This market turned down this past summer. This was the pullback in
stocks and money then moved from bonds to stocks. In addition the government
has had big supply but so far big demand for its debt. Still, the EXP MAs have
turned down not up since. At top the RSI remains under the 50% mark. At bottom
the histogram has also turned down. So for now the market prefers stocks to
bonds.  We are witnessing a weak
counter trend rally after the big fall at the end of December.

Funny thing, back then in 1987 it was  a June July cross over as well!  From there bonds dropped 14 points to
the low in October.  While a
past incident is no indication of what may happen, this is a similar set up.

Optimism has blossomed as thought the 2008
crash never happened. Investors are flocking to bond funds and REITs which just
hit new highs. Yet apartment rental vacancies are high and adjustable mortgages
are being re set.  Fundamentally we
have a set up here for disappointment again.

The red black bars are ICF the AMEX Real Estate Investment Trust. The Line behind it is the JNK or Junk bond ETF. At bottom however is that rush to safety known as the 30 year bond price. So investors are eschewing Govt Bonds and rushing to the high yields of REITs and JUNK bonds. Gee, this is hardly a risk averse atmosphere as p/e ratios top 22 on the overall market. 

So socionomics wins again, Investor optimism soars as though the crashes of 2000 and 2008 never happened, and forget real estate FNM FRE Lehman and such. Everything is just fine now, right?

Periods of reduced economic activity follow periods of expansion and so 1908=1929 was followed by 1930-1948. Now 1982 – 2000 is followed by 2000-2010, but hey we are only half way there time wise. 

Too early to wade in the water of risk ……