MP Bonds May 24th

Alley: Didn't you say in an earlier posting that the inverse relationship between stocks and bonds is no longer valid? I think, if I remember correctly, you referred to it as an 80's concept that doesn't hold anymore...

yes i did and it is still valid. however for the last 3 or 4 days there has been a clear inverse relationship as there has been an asset allocation out of stocks into bonds hence the reason why we had the squeeze off the lows in bonds. The bond market additionally sniffed just the whiff of singed bulls fingers in stks and was worried about a possible liquidity mirage trade that threatened to manifest itself on several occassions in last 10 days in stocks that if it had got going (and it still might) then we were looking at the closest that we have been to a 1998 type market.

Do you think that it's possible that the inverse bond/stock market relationship can return and stay with us for many months or years?

There are many influences on bonds too many to mention all here but to mention a few: supply/demand ratios with regard to type of investor whether CB, mutual fund, bank trader, real money - all of whom have different needs and tax reasons and time horizons - to asset liability mortgage gap mangement or convexity trades to inflation to spreads vs corporates or emerging markets or overseas markets to perception or reality about the path of future rates that influences funding (and also influences stock valuations in terms of the risk free premium to calculate whether stocks or bonds are cheap/expensive in relationship)etc etc. Right now much in terms of the short term relationship between Bonds (and note I state bonds not 10 years for 10 yrs are 85% a function of arbitrage vs the German 10 yr Bund) and stocks is being governed by flow. Initially in the first quarter which is not a market profile quarter (which runs from February btw) was from Japan selling in excess of 85 bln of bonds. That selling dried up as the prices drove to continual new lows to the point where I was frankly a little early by 2 weeks calling for a good old fashioned short squeeze in bonds (of which we have only seen a very mild form so far) and therefore left the market looking for other influences. It found them in Stocks and so we have had a few days of lock step inverse trade. The last 15 odd years has seen a situation where bonds have dropped substantially in yields and stocks have risen. ie the markets have broadly moved in the same direction. imho we are unlikely in the medium term (next couple of years) to have anything but occassional (which may work for several months)inverse correlations followed by parallel ones so the short answer to your question is in broad terms the short term should see the inverse relationship work but in the medium term they will continue to be locksteped. I when I do MP I always apply the logic to the individual market first then occassionally see what else fits to confirm MP not the other way round. MP tells me all I need to know and can be at times 90% probable but as not everyone is a fan I will add comments about other influences which hopefully helps people better understand some of the movements

quote:

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Originally posted by alleyb

...Initially in the first quarter which is not a market profile quarter (which runs from February btw)...

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This quarter that you referred to in the last post. Is that an annually recurring concept or a one off unique quarter that happened this year?

If it occurs annually and it is not an MP quarter then I assume that what you are saying is that your standard technique for MP don't work in that quarter right? If that's the case then why would you not just reverse the signals?

A bond quarter (always has been always will be) for MP is the February/May quartile just as the Grain quarter is off vs the tradional calendar quarter.

And this is not an MP quarter because...?

ok lets make this real easy.
I wrote "Initially in the first quarter which is not a market profile quarter (which runs from February btw) was from Japan selling in excess of 85 bln of bonds"
You then answered/questioned. so let me re-write this
"Inititally in the first 3 monthperiod of 2006 ie Jan-march the Japanese sold $85 bln of....A Quarterly MP chart in Bonds starts with effect from February thru May thru August thru Nov and back to February etc and runs slighlty off the Calendar quartiles..... I was referring to the Calendar quarter and stating as an aside that a calendar quarter is not the Bond MP quarter (even though Bonds trade futures on the March/June series for the calculation of MP in Bonds for the Quarterly profiles you would use the February/May quartiles.
Hopefully by going a little round the houses here this is now clear

Thanks Alley - I understand now. I thought you were referring to an MP strategy which didn't work during those periods and not the demarcation of when to start and end the creation of MP graphics. Thanks for clearing this up.