It is said that bond traders are 2 steps ahead of stock traders. If that is true then the technicals of the bond market are pointing to a major rally in stocks.
Technically the 20 year bond as evidenced by TLT looks like it is breaking down and heading towards a sell off.
1) TLT is exhibiting the attributes of a classic double top. At the end of May TLT surged up to 130 on large volume. In July it hit 132 but on much lower volume. Over the last week it tested and held it’s 50 day ma of 127 but on increasing sell volume.
2) There is a bearish MACD divergence as TLT hit a higher high but the MACD hit a lower high. The same holds true for the RSI.
3) The RSI is below 50 and the stochastics are on a sell signal.
4) A drop below 124 will confirm the breakdown as TLT will be heading towards a minimum of 118.
On the weekly charts TLT closed the week of July 27th with an outside bearish candelstick and last week it closed with another bearish candlestick that hit a lower high. There is also a bearish RSI divergence as the RSI hit a lower high as TLT made a higher high.
If money is coming out of bonds it in all likelihood is heading into the stock market.
How can the stock market possibly rally in the face of a slowing worldwide economy? My guess is that the markets will rise in anticipation of worldwide QE provided by the world’s central banks. The stock market looks ahead 6-9 months and by then a ton of monetary liquidity will be pumped into the system.
There is also a lot of negative sentiment out there as many analysts are cautious to bearish on the stock market and commodities. The investing public has been withdrawing capital from their mutual fund accounts and either been putting it in a mattress or fixed income funds. I consider these factors to be contrarian indicators.