Stocks were higher this morning, but bulls struggle to find stable footing and the market now finds ...
A Time to Be Cautiously Bullish
06/10/2013 9:00 am EST
The bull case for bonds and mining stocks is weakening, as with the markets in general, but it's not over, writes Stephen McKee of No-Load Mutual Fund Selections & Timing.
The Treasury announced it would repay $35 billion of debt in the second quarter. This was in contrast to an expected borrowing of $103 billion.
The fiscal cliff (raise taxes) and sequestration (cut spending) have had one of their intended effects, which was to pay down debt. While one quarter doesn't make a trend, and while one quarter is not akin to the meaning of secular (five to 30 years), it does remind us that every trend will eventually end.
The secular bond bull market has lasted 30 years. If Federal debt as a percentage of GDP begins to consistently decline, interest rates may reverse course.
In the meantime, I remain generally bullish on bonds. The Fed is still committed to buying $85 billion of bonds per month. The European Central Bank and Bank of Japan are also attempting to force rates lower. These things may contribute to the end game.
When the ratio between the weekly XAU (an index of 16 gold mining stocks) and SPDR Gold Trust (GLD) rises, it indicates that GLD is stronger than XAU. When it falls, it shows the reverse.
The current weak ratio suggests that mining stocks (XAU) are "cheap" relative to the price of gold. It suggests that either XAU should rally or that GLD should fall more to get the ratio back "in line." The last time the ratio spiked higher like this was October 2008, when XAU tumbled much further than the price of GLD would warrant. So, a cautiously bullish development.
More of the same from the timing indicators. Economic news remains generally mixed with a positive bias, and the stock market loves it. It is banking on Bernanke to bail it out with easy money. Frankly, so far, it has been working. Witness also the recent price recovery in the housing markets across the country. The wealth effect is palpable.
The trouble is the stock market moves long-term on earnings, not on the level of interest rates. At the same time, it's hard to argue with an uptrend that is still climbing the "wall of worry" that morphed over the last year from Europe to China to fiscal cliff to sequestration.
Higher taxes and reduced spending should have taken their toll, but the odds of a recession are slim to none right now. So, the trend in stocks remains up, supported by easy money and corporate belt tightening that has helped earnings.
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