Bond Yields Rising

Below is a chart that illustrates the decline in Treasury bond yields since April. We are now seeing the beginnings of a possible change in trend with yields braking through the top channel line. Bond prices run inversely to bond yields; therefore, higher yield means lower bond prices.

Investments in the low yielding US Treasury market represent a risk aversion trade. When the stock market is in rally mode investors will often times sell treasuries and buy stocks. I believe this is happening now.

Bonds have been the investor preference since April. We should know shortly if investor preference is shifting in favor of stocks longer term.

(Click on chart to enlarge it for easier viewing)

Market Comment 09 06 10

The market got a huge boost last week when the jobs report came in better than expected. Jobs are what the market wants to see. The market advance however was made on extremely light volume.

We will have to see if there is any follow-through next week when Wall Street traders return from their summer vacations.

Relative Strength of Stocks Versus Bonds

Relative Strength of Stocks Versus Bonds

The chart above displays the relative strength of the S&P 500 versus the long bond (30 year US Treasury Bond). When the line is rising, it indicates that stocks are outperforming 30 year treasury bonds, while a falling line indicates that bonds are outperforming stocks.

The relative strength chart above clearly shows that bonds have been outperforming stocks the last few months. The type of bonds we hold in our model portfolios are comprised of a diverse group of holdings, i.e., government agency bonds, corporate bonds, high yield corporate bonds, etc.

When the financial news networks, such as CNBC, refer to bonds they are generally referring to either the 10 or 30 year US treasury bonds. The long maturity bonds will fluctuate based on both interest rate changes and changes in the bullishness or bearishness of the stock market. Money will move out of safe haven treasuries and into the market as stock market rallies take hold and vice versa when stocks fall.

Unlike treasuries, high yield bonds act more like a proxy for the stock market. If the stock market rises high yield bonds tend to rise.

If the stock market rally that began late last week proves to have staying power, I will be adding to our high yield bond positions.

The Gerritz Letter - Corrected Performance Chart

Below is a corrected performance chart for the Sept 1st 2010 issue of The Gerritz Letter. I inadvertently posted the one month rate of return figures rather than the full quarter rates of return. I will update the chart in The Gerritz Letter posted on our website as soon as possible.

The corrected quarterly rates of return should read as follow:

DBLTX =  6.41%

PTTAX = 4.66%

PDVYX = 3.94%

MWHYX = 4.19%

SPY = -3.25% (Spy is our benchmark - We do not current have a position in SPY)

(Click on chart to enlarge it for easier viewing)

I will also send out an email notification and update of the chart correction.

I think you will agree that the quarterly performance of our Low Volatility portfolio is very good, especially when compared to the S&P 500 results.

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Market Comment 08 27 10

After three consecutive weeks of stock market declines, the bulls finally surfaced today and, supported by Fed chief Bernanke's encouraging words, pulled the markets off their lows. Despite Friday’s strong up move, the effort was not enough to propel the major indexes into positive territory for the week.


The Dow lost 0.6%, while the S&P 500 and Nasdaq gave back 0.7% and 1.2% respectively.

The economy is clearing slowing down and the markets have been adjusting to this reality. Individual investors are very bearish at the moment. Bearish extremes often times however lead to a short term turn in the markets. We may see the market go into rally mode for a few days.

Market in Oversold Territory

The market has closed lower 10 of the last 12 days.

As shown below, today's declines have put the S&P 500 back into oversold territory. The index is back down more than 5% year-to-date, down 6.66% since August 9th, and up just 2.9% off the July 2nd lows.

The market should bounce soon, but I remain skeptical of a rebound that has any legs. The technical condition of the market has deteriorated a great deal and risk remains high.

For now we will remain safely in our low volatility income / bond funds.

Chart source: Bespoke Financial

Lipstick on the Dow

I borrowed this chart and comment from Chris Kimble. It gave me a chuckle, so I thought I would share it. Since we are out of the stock market at the moment we have the luxury of poking fun at it.

(Click on chart to enlarge it for easier viewing)

Chris comments: Does lipstick change the looks of this pattern? It could take just one day to make the potential Head & Shoulders pattern one for the record books! "Catch up" isn't something that you dip your French fries in. It's, among other things, the fact that equities can "catch up" with the fundamentals in a blink of an eye!


Definitions:

Head and Shoulders Pattern
  
This pattern suggests that lower prices may be ahead. This chart pattern does not guarantee a decline, but none-the-less it is worth paying attention to.