Stephen McKee of No-Load Mutual Fund Selections & Timing sees some strong near-term movement in store for bonds, gold, and stocks, and he explains what investors need to follow.
The Bond Timing Model is still moving through some whipsaws where the trend quickly changes from up to down and vice versa. These short-term changes happen every once in a while, so at times we need to back up and look more at the forest than the trees.
Given a narrow view, it is hard to believe that bonds have actually put in a secular bull-market top. The fourth quarter’s advance GDP estimate actually came in negative. The Federal Reserve will continue to keep short-term interest rates near zero, and will continue its bond-buying program at least until unemployment hits 6.5%.
However, a wider view shows housing is recovering. Unemployment is dropping. The Conference Board’s Leading Index is now hitting a recovery high. So, I’m shifting from bullish to neutral on bonds.
Then, looking at SPDR Gold Shares (GLD) and its relative performance to the S&P 500 from 2005 through the present, we see that after strong advances in gold, the price tends to go sideways for months. But after the consolidation (sideways trend), GLD moved higher. Will the same thing occur this time?
Given that the background (ongoing Central Bank monetary easing within a mild economic recovery) appears similar over the last seven years, I’d have to answer yes. It's more a question of when than if.
For stocks, the markets—on a technical basis—appear to be back in gear to the upside. So while pullbacks are normal and necessary, they should be mild (3% to 8%) and quick (days to weeks), followed by rallies back to recovery highs.
At this time, we may be on the verge of one of those pullbacks. Economic fundamentals don’t appear to have strengthened, but are about the same. Fiscal policy still has to be dealt with. We've got the tax raises, but what about the spending cuts?
As well, investor sentiment is now too bullish. So, like gold, consolidation in stocks appears likely.