Value of Perfect Information

The S&P 500 has just completed a head and shoulders top and has broken its neckline which is considered a bearish signal moving ahead.  The downside price target should be equal to the distance between the head peak and the neckline. This break of the neckline implies a downside target of around 810.  Interestingly though is that the American Association of Individual Investors, AAII,  bearish sentiment is now at 55%, which surprisingly has not been this high since early March 2009 and we all know what happened back then!  

Interesting as well is that investors are still moving into corporate bonds.  The ratio of treasuries over corporate bonds is still less than one and currently at .95;  investors still have confidence purchasing corporate debt in that investors are still willing to put faith in our corporations. When the ratio is more than one, investors are flocking to the safety of Tresuries and confidence in our corporations is waning, and likewise it is not good for the economy and earnings

That ratio can also be found in my Treasury/Corporate Ratio category on the right and here:

http://www.bostonwealth.net/category/markets/market-sentiment/treasurycorporate-ratio/

A sobering fact:  As of June 30, U.S. stocks have underperformed long term Treasury bonds for the past five, ten, fifteen, twenty, and 25 years.

A ray of sunshine: There’s almost never been a 30-year period since 1802 when stocks have underperformed bonds.

The bad news:  The current long term treasury yields are too low. Long bonds have a track record of yeilding much more than inflation; something investors are acutely aware of when investing in long bonds.

A recent study has shown that  long term bond rates on average have exceeded the inflation rate by about 2.4%. However seeing that the 30 year yield is around 4.3%, an investor can figure out that this only 1.9 percentage points of its current yield represent compensation for inflation over the next 30 years.

So why would you buy long bonds.  The rate is so low that you can hardly keep up with the consumer price index’s overall historic average

Tags: S&P 500

Categories: Commentary ,Treasury/Corporate Ratio

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