Bonds Fall, the End of the Conundrum?

By: Robert McHugh | Sun, Jun 12, 2005
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Bonds keep rising and long yields keep falling. Forgetting the patterns for a moment, either one of two things are occurring. Either we are going to see a flat - possibly inverted - yield curve at a level of historic lows for interest rates (which means a recession and sharp equity market sell-off is coming), or some huge force (we won't mention names) is monetizing our nation's debt, buying Bonds clandestine, in order to keep long interest rates artificially low to support an ongoing real estate bubble. The Maestro confessed to Congress this week he'd finally figured out the "conundrum" in Bonds. He blamed it on global deflation from an expanding world workforce, but don't rule out the possibility that privately he uncovered the shifty-eyed, coke-bottled bespectacled rogue bureaucrat who's been adding Treasuries to the Fed's portfolio from a lonely terminal off some side street on a mosquito infested discreet island. In any case, we aren't going to have robust economic growth and a flying equity market with long-term interest rates under 4.00 percent, regardless of how phony the official economic numbers become to the contrary. If price action is legit, it could be a sign that smart money is fleeing to quality.

The chart shows Bonds completed an Elliott Wave countertrend rising Intermediate degree wave 2 in the form of a Broadening Top, Megaphone pattern. Because the direction of prices preceding this pattern was up, this is considered a top formation. Prices have risen so high recently that they pretty much blew up the Bearish Head & Shoulders top pattern, but formed another Bearish pattern, a Double Top. Bonds declined sharply - almost 3 points - since topping on June 3rd at 119.72, very close to the June 2003, 120.80 top. It looks like Intermediate wave 3 down is off to a fast start now that they apparently nabbed the varmint.

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"Humble yourselves, therefore, under the mighty hand of God,
That He may exalt you at the proper time,
Casting all your anxiety upon Him,
Because He cares for you.
Be of sober spirit, be on the alert. Your adversary,
The devil, prowls about like a roaring lion, seeking someone
to devour. But resist him, firm in your faith,
Knowing that the same experiences of suffering
are being accomplished by your brethren who are in the world.
But after you have suffered for a little while, the God of all grace
Who called you to His eternal glory in Christ,
Will Himself perfect, confirm, strengthen and establish you.
To Him be dominion forever and ever. Amen."

1 Peter 5:6-11

Paid subscribers during the month of June 2005 can receive a free copy of the book, Elliott Wave Principle, by Frost and Prechter, while enjoying an 18 percent discounted special annual price of $239. To subscribe, go to www.technicalindicatorindex.com and click on the Subscribe Today button. Or, if you are unfamiliar with us, email us with a request for a free 30 day trial subscription by clicking on the "contact us" button at our site.


 

Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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