A contrarian, pro-Treasury bonds point of view

Last week started with US treasury bonds moving opposite of stocks, almost tagging a Fibonacci target below while stocks were well up. By the middle of the week, stocks had swooned though trying to recover, and bonds had stabilized. Then they both moved up together into the end of the week. This leaves the US treasury bonds not having traced a trend reversal pattern. At the same time, stocks have potentially traced a bearish trend reversal pattern, and only if they can make last week's highs into support do they have the potential to make new higher highs. Stock market numbers to watch include the Dow at Friday's high; or if above, then at 12,840 to 12,850. Given this potential bearish reversal in the US stock market, and the fact that other stock markets in the world are at much lower levels, this has a lot to do with why the US treasury bond market is holding up so well.

On a Fibonacci basis, it is possible for the US long bond ($USB or the futures /ZB) to actually make higher highs even up to the level of 160. To instead make a downward trend reversal here, it would have to move under 148 and even better 146 on strong selling volumes. We haven't seen that yet. The bond market may be smelling something that many stock investors haven't noticed yet.

Below are daily and monthly charts of the US long bond. I've also added a daily chart of TLT, the ETF that tracks the US long bond. The TLT chart shows that the selling volumes on the recent dip didn't even exceed the buying volumes that preceded during the most recent run up. We would also want to see more negative divergence going into the highest price, whenever "the top" does arrive.

You can see that, although there was a consolidation, a trend reversal pattern has not yet occurred. A trend reversal pattern would require lower lows on increased selling volumes. Until we see that, it's one clue that smart money is remaining in bonds, and may be avoiding stocks. There are even analysts now saying the stock market has topped out, and will only make its own pattern of lower highs the rest of this year and into next year. If that's true, then it supports the idea that US treasury bonds will do well for a long time. Even Martin Armstrong has recently (http://armstrongeconomics.com/693-2/2012-2/mirror-mirror/) explained why, in these uncertain times with other markets drooping and capital fleeing to perceived relative quality, the US dollar and US bonds may be one of the last holdouts of strength; at least until stocks reached whatever bottom they're going to find and finally make a long term cycle low-perhaps sometime next year or in 2014.

A similar discussion about why bonds are holding up so well is available from Terry Laundry in his audio commentary this weekend, at his "Best Bond Strategy" website at http://www.bestbondstrategy.com/.

All in all, given the uncertainties in stock markets and even commodities under pressure, it may not be such a great surprise that US Treasury bonds have proven resilient so far. They may continue to do well in the coming months. And if next year proves to be the significant risky time we've been bracing for, they may hold up into next year as well.