Stocks Set To Bounce As ‘Cult Of Equity” Poised To Gain Members In August 2012 And TLT Falls:
Stocks could bounce after a rangebound week of low volume that lacked volatility. A small increase in volatility could occur next week but this could be associated with a wider trading range and less of a ‘fear trade’. The so-called “cult of equity” is poised to gain new members if investors see stocks go higher and don’t want to be left out of future gains. Earlier this month, bond trader Bill Gross stated that stocks would be bad investments for years. This would have been good advice if he stated it in 2000 – 2002 but then, stocks rose sharply until 2008. To claim stocks won’t move after more than a decade of sluggishness could be the top for the bond bubble and is a late call.
We pointed out the bond bubble was poised to pop on July 25, 2012 and since then, the long bond has underperformed. The TLT fell below key support levels and dipped below our target of $124 last week and downward momentum could take the 20 year bond exchange traded fund to $117. This would be positive news for stocks as investors await central bank news from China and the U.S. as both economies struggle to grow. A decrease of 10 percent from the recent peak we identified in the 20 year bond would cause us to reevaluate its direction short term. We are looking for any signs the market is positive on political economy expectations of decreased uncertainty. Small caps may catch up to the rest of the market and begin to outperform as investors assume more risk.