7/11/10 Capital Preservation/ Heard It Through The Grapevine

Remember the (unusual) positive correlation we noticed recently- both stocks and the long bond catching bids simultaneously (I recall more than one post that noted gains in TLT while the market rallied)?

Here's one author who believes the divergence resolves with a market slide:

http://www.marketwatch.com/story/its-time-to-protect-stock-portfolios-now-2010-07-01?pagenumber=1

Let's begin with the assumption that the market looks ahead 6-8 months. If we look at the 400 point rally in the DJIA, it would appear to be a turnaround signal in the midst of prevailing (media) negativity.

On the other hand, prevailing wisdom attributes greater predictive power to the bond market, which is at least twice the size (in dollar value) of the stock market.

So what does the bond market 'see' 6-8 months down the road? The stock market is a just a dweeb- the bond market is the grapevine.

Anecdotally, I'm a little worried. Last year everyone was [let's call it] 'reflexively' negative: news headlines + the hit to one's stock portfolio made it 'easy' to be negative. However, the 'paralysis' and denial that often accompanies shock + the usual lag time before shocks hit home + the dead cat bounce in the markets- all of that helped to keep reality at bay. This year the headlines have come home to roost for many people, including many people I know.

I have only one prediction, which is that the markets sell off sharply this year. And Mark shows up at our end-of-year dinner carrying a bottle of Nadurra.