Bond and Dow Gap Worries

Dow Treasury GapWell, it seems as though my prediction from my March post has pretty much come to past. Those of us believing that the worse is still to come are a small minority at this point. Sure, many agree that we could "pull back" a bit, but they assure us that indeed the worst is over. Hedge fund managers are drilling clients that this is the time to load up and not "miss this opportunity." This does not waiver me personally from my strong belief of a still upcoming capitulation, which is why I chose to write a post about it in March. If you are one of those that has agreed with the many, that's fine, and as I always say, trade in a way that you are comfortable with. We can respectfully agree to disagree.

Another potential scary problem we are seeing in this market, which I find very perplexing, is the enormous gap that we are seeing between the recent Dow movement and bonds. You can see from the above graph the huge gap that separates the two. What is really unique about the graph, is that it is almost always bonds which are on top. Rarely have wee seen such a spread that currently exists and there are some serious repercussions for us if the gap continues.

It is obvious that the huge drop in prices of bonds have been due to the recent surging in interest rates. As a result, such interest rates are bound to cut into corporate profits. Naturally, what is to occur when corporate profits are being reduced (keyword being NATURALLY, without government interventions)?. Stock prices go down. So you can see why to see such a big gap is mind boggling. This is just one more problems to tack onto the list of reasons why I see big problems ahead. In my opinion, I believe this gap has to close and with there not being much let up in interest rates, I believe it will have to be the downward moving of stocks that closes the gap. Happy Trading.


  1. Craig Says:

    Cool down FF, Get long. Look at the half full part of the glass. It's hard to bet against John Paulson. He said worst may be over. Cheers.