What Bonds Are Saying

End of the low-rate era?

The Bubble That Broke The World

Bond Massacre!

Is a 1987-Style scenario taking shape?

Bond Market Delivers Equal and Opposite Reaction

Runaway Trains

Inflation or Deflation?

30-year mortgage rates top 6 percent, Long-term benchmark surges higher for 6th straight week

The current situation in the Bond market is troubling. The long term bond prices have had one of the biggest sell offs in history. When bond prices fall, bond yields go up. The long term bond yields have been rising despite the very low short term interest rates. The big problem here is that this strongly effects the housing market, which is the one bright spot of the economy and has helped fuel consumer spending by morgate refinancing and new homes purchases. However, this the Long Term bond Yields keep rising, the housing market could cool off quickly, thus causing consumers to stop spending and causing the economy to crash along with the stock market. Rising Bond Yields will also cause major weakness in housing stocks, a few stocks to watch are NVR, RYL, TOL - these could become good long term shorts.

Bond prices are directly linked with the stock market. When bond prices fall, the stock market usually follows in a short time. Therefore, the recent large fall in Bond prices leads me to believe that the market is living on borrowed time. Also, recent data shows that cash levels in mutual funds are at all time lows. This is generally how market rallies end, the buyers get exhausted and have no more cash to buy and sustain the rally, thus the sellers soon take over.

In closing, I am not short anything at this time. I trade using technical analysis and the charts are still holding up on the major indices. Therefore, I will not become a bear until the Index charts break down. However, I think a market top is near.

Below are two mutual funds to take advantage of a market correction when it happens: Notice how these funds have been in a downtrend for a long time and are both close to breaking out.

If the resistance level of 31.10 on the ProFunds UltraShort is broken to the upside, I will purchase shares of this fund to take advantage of a market correction/pullback.

If the resistance level of 39.50 on the Rydex short fund is broken to the upside, I will purchase shares of this fund to take advantage of a market correction/pullback.

The VIX or Volatility index is ratio of put options to call options. It is a useful indicator because it indirectly measures market psychology. The VIX is like a contrarian indicator, when it's low, it means that more people are buying call options, and thus are bullish on the market. Contrarian theory tells us that the majority of people are wrong about the stock market, therefore when the masses are overly bullish, the market is usually topped out and about to tank, and vice versa.

The VIX can be used in two ways:

1. Usually the VIX is used to indicate when the psychological levels of the market are overly bullish or bearish. Overly bullish levels are in the mid 20s and lower, while overly bearish levels are in the upper 40' and higher. Traders use these levels to indicate when the market is at extremes, such as oversold or overbought. The old saying applies, when the VIX is low it's time to go, when the VIX is high, it's time to buy.

2. The VIX can also be used to forecast the market direction because of it's inverse correlation to the market direction. For example, by using technical analysis, if you decide the VIX is going to fall in the short term, the market will usually rise, and vice versa. Normal pattern or technical analysis can be preformed on the VIX an attempt to decipher short term market direction.

The chart below gives an even long term chart of the VIX. The recent rally in the VIX is not surprising giving the support uptrend line. Below you can see that the VIX bounced off a multi year uptrend support line going all the way back to 1998.

38% = 8630

50% = 8400

62% = 8165

On a shorter term basis, you can see that the XAU broke out of a Bullish Flag formation, but has pullback back fairly hard recently with the weakness in gold metal. The chart below, however is technically strong and will bounce back quickly if gold metal can bounce in the short term.

Just click on the chart symbols in the tables below to pull up a real time chart from Stockcharts.com and you will find a detailed explaination right on the charts.

The US dollar rallied hard off multi year support and created a Bearish Flag. This Bearish Flag was broken to the downside which created the rally in gold two weeks ago. However, as you can see, the US dollar recovered and rallied strongly last week to again retest resistance in the 97 area. The rally in the US dollar caused the sharp pullback in gold metal last week. A very strong indirect correlation exists between gold and the US dollar, i.e. when the dollar falls, gold rises, and vice versa. However, one day this correlation will need to be broken in order for gold to really breakout, which I expect it will.

In the short term, the dollar needs to find resistance here and pullback, otherwise gold metal and gold stocks may pullback much further.

Below is a longer term chart of the US dollar. Based on the historical data of the chart below, the current rally in the US dollar is probably temporary.