E-piphany

It was a great day in the Northeast for golf, but not so much of a good day to be a bull…in anything. Stocks (-0.4%), bonds (-13.5 ticks on the TYU0), commodities (GSCI -0.9%), gold (-0.5%), oil (-1.3%), the VIX (-0.95)…you name it, it was falling. The only reason currencies didn’t fall is that both sides of a currency pair can’t.

The good news is that the declines were small; the bad news is that on a day without very much news, it seems to suggest the market bias is to reduce positions.

Interestingly, today there was a story on the AP (see the story here) which might give one pause for reflection about today’s “sell everything” phenomenon. According to a report from Fidelity Investments today, a record number of workers made hardship withdrawals from their 401(k) and IRA accounts in the second quarter, and the number of workers borrowing from their accounts reached a 10-year high. In the second quarter of 2009, 45,000 people made a hardship withdrawal from Fidelity; in the second quarter of 2010, well into the supposed recovery, the total was 62,000. Moreover, of the people who took a hardship withdrawal last year, 45% took another one this year.

This is a very understandable measure of the stress on the citizenry this far into the recession/depression/recovery. It also could be one reason that markets have been a bit soggy. It’s hard to invest that money in stocks when you need it to pay this month’s mortgage.

This factor – that Americans are drawing down liquid wealth as their illiquid wealth has shriveled and the job market has been unable to compensate – may be why stocks have been having trouble and are feeling very heavy here even in the neighborhood of reasonable support. I think 1046-1070 on the S&P is an indecision zone; below 1046 it becomes pretty obvious that the early July lows will be tested and probably broken.

Bonds are making me a little bit nauseous with the altitude, and although they haven’t done anything particularly wrong technically yet it is fair to say the 140bp, four-and-a-half-month rally (from the April 5th high yields at 3.99% on the 10y note) is overdue for a pause and some consolidation.  The next couple of weeks is an ideal time for such a pause as the calendar turns very friendly to bonds beginning in early September. The most-dependable seasonal pattern in fixed-income is typically the September-October rally; while I have a hard time thinking such a rally will unfold in its typical dimensions I simply won’t short bonds in those two months unless I have a very good reason (or, more likely, two or three good reasons).

In the big picture, the rally hasn’t violated any of the long-standing trends (see Chart). I continue to believe that the low yields in the crisis marked the end of the secular bull market, as I said at the time, but the market seems to want to challenge my belief.

The secular bull in bonds: still alive and well?

Incidentally, the lower trendline on that chart (which is on a logarithmic scale, as is appropriate for such large moves) comes through at 2.47% right now. These are monthly points, but if I am wrong about the market’s consolidating over the next couple of weeks then we might well pierce this level at month-end. The real test for the “secular bull market is over” thesis doesn’t come until the market reaches to new low yields, and that is still a bit away.

As am I – away for a bit, that is. I will be vacationing for the next week, out in Colorado. This comment will not be produced in my absence but shall return on Monday, August 30th. In the meantime, you will have some home sales data (both new and existing), another Initial Claims figure, the Chicago Fed index, Durables, a 30y TIPS auction, and a big revision lower to Q2 GDP, currently expected to be 1.4% versus the original 2.4% print.

Thanks to all of the readers and subscribers who have given me so much to think about in your carefully-considered comments to my column. I definitely enjoy the friendly posts and ripostes, and look forward to resuming our dialogue in a week!