A key theme in our market outlook is the dynamics between markets. Particulary, comparing bonds with stocks gives a good idea of where markets are headed, and that is the reason why the bonds to stocks ratio is our favorite indicator for the outlook of markets. Both assets are representing opposing forces, i.e. bonds are an indicator for safety and stocks for risk taking.
So far, the market outlook in 2016 has been determined by volatility. Gold responded extremely well in such an environment, and bonds went up sharply as well. However, as volatility eased in the last two months, gold was not able to break through its downtrend and bonds have gone nowhere basically. The first chart makes our point: since February of this year, the 20 Year Treasury Bond has moved in a tight range, unable to move higher.
However, 20 Year Bonds are forming a beautiful triangle chart pattern, with support around $124 and resistance at $132. The range is becoming very tight, and prices are near all-time highs.
Market Outlook 2016
There is no short term trend at this point, based on the above chart, but a trend will arise shortly, as soon as the pattern will be broken (either to the upside or the downside). That is the key message of the bond market.
It comes even more interesting as we deep dive into the wonderful world of intermarket dynamics. The bond versus stock market ratio is in a trendless state currently, as seen on the next chart. However, it will not take much of a movement to start trending, and it can go both directions. Remember that a declining bond to stock ratio suggests a “risk on” sentiment among investors, which is what we saw until 2007 and after 2009.
Investors should watch how the TLT, 20 Year Treasury Bonds, behave around the $132 level. A strong break higher combined with a rising bonds to stock market ratio suggest the market outlook for 2016 becomes grim, and investors will prefer safety (bonds, gold, Yen). On the other hand, as long as $132 is not broken to the upside and the bonds to stocks ratio trends lower (especially below the trendline marked in the second chart) it would imply that stocks will be the way to go for the remainder of 2016.