Market Roundup
Dow -23.65 to 17,623.05
S&P -3.97 to 2,071.18
NASDAQ +2.84 to 5,034.70
10-YR Yield -0.02 to 2.06%
Gold +$0.20 to $1,162.70
Oil -$0.68 to $43.92
I’m a bond guy. I’m not afraid to admit it. The action in Treasuries, or emerging-market debt or even municipal bonds may sound boring to some people. But I find that fixed-income markets often provide early and accurate information about the economy, not to mention the next major moves in stocks.

So with that in mind, what gives with Treasuries here? The Dow Industrials jumped almost 500 points at the end of last week. The Powershares QQQ Trust (QQQ) jumped to within a couple bucks of its summer high.

But 30-year Treasury Bond yields have barely budged, and are still holding firm in the 2.85%-2.9% area. Moreover, the 5s-to-30s Treasury yield spread actually shrank in the past few days … and the 2s-to-10s yield spread hasn’t been able to get off the mat for the past few months.

Bond investors do not seem convinced.

These are the exact opposite reactions you’d expect to see in bonds from an easing in policy — which is designed to boost growth and inflation after all. Stated another way: If bond investors really believed that yet another round of global QE would succeed in boosting economic prospects, they’d be selling the heck out of bonds. They’re not. That tells me they know it’s going to fail just like every single previous round did.

While I’m highlighting market oddities, I’d note that natural gas prices plunged to fresh multiyear lows in the past couple of days. Crude oil also dropped back below $45 a barrel.

That’s certainly not the kind of reaction you’d expect from another economic shot in the arm from policymakers. Nor is it a positive for the credit quality outlook, given investor worries about the ability of energy companies to service their large debt loads.

“That’s not the reaction you’d expect from another economic shot in the arm from policymakers.”

I suppose I could also point out that the broader Russell 2000 Index is barely moving at all, despite the surge in mega-cap stocks. Then there’s the Dow Jones Transportation Average. It remains far below its previous high, which was set all the way back in November 2014.

Bottom line? I’ll be the first to admit I was surprised by the magnitude of last week’s rally. But it’s clear bond investors aren’t buying the euphoria yet. Unless and until that changes, I remain wary of risk assets in general … and many stocks in particular.

What do you think? Are bond investors on to something? Or am I just worrying about nothing here? Do new lows in natural gas, or ongoing weakness in crude oil prices, concern you? Or is the strength in tech stocks and big cap names enough to keep you “long and strong” the market? I’d love to hear from you at the Money and Markets website when you have a chance.

Our Readers Speak

Meanwhile, many of you already shared some thoughts online about last week’s big rally.

Reader Holygeezer said: “What the heck is going on with the markets? The Nasdaq is back over 5000. These markets are so corrupt and manipulated there are no words for it. The One Percent must be laughing their heads off as to how easy it is to juice the markets at will.”

Reader Irv S. added: “The market has been moving up in a parabolic fashion. At some point — probably sooner than later — the fast money traders will pull the plug, sell their longs, and short the market. I’m content to be mostly in cash and short duration high quality bonds. I sleep better at night.”

Reader $1,000 Gold was more optimistic, saying: “A classic inverted head and shoulders formation is about complete in the S&P. The right shoulder is forming now. Expect the usual bear trap before the correction ends. The bear trap is one last scary pullback that brings the bears out in full force, but is actually a great buying opportunity. Smart money will take advantage of that.”

But Reader Robert P. sided with the bears, offering this take: “This pattern we are in right now seems very much like about this same time of the year in 2007. It was along about then that the Fed unexpectedly injected their first batch of liquidity into the system.

“The markets went up like wild, just like the Draghi rally and the Chinese rate cut. But it turned out to be about the top of the rally, and the real blood-letting came about during the course of the next year. So based on that, 2016 may turn out to be a bear!”

Bottom line: Everyone has an opinion about the latest action, and what the technicals and fundamentals are telling us. I’ve stated mine clearly on a number of occasions in recent months: The bull market and the economic expansion are under threat from all sides. The big breakdown we saw in August looks like the start of the next bear market to me.

Plus, we’re seeing major divergences during this October rally. That’s unlike anything we saw in past rounds of QE, which pretty much drove every asset class on the planet up at the same time and in roughly the same fashion. So I remain cautious here.

Anything else you want to add? Then here is the link you can use to do so.

Other Developments of the Day

● Well, it looks like the Wall Street Journal isn’t mincing words. The lead of its main story online today: “Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending.”

It goes on to note that sales for S&P 500 companies are likely to drop 4% from a year ago, the third decline in a row. That hasn’t happened since the Great Recession in 2009.

● America has become a “Renter Nation” in recent years, as the financial and psychological fallout of the housing bust drove many individuals and families to rent rather than own homes. But could the boom in apartment construction and the surge in building pricing be signaling a top?

That’s what some are wondering in the wake of Sam Zell’s decision to sell more than 23,000 apartments for $5.4 billion. The real estate billionaire’s sale represents roughly one-fourth of all the units in the portfolio of his Equity Residential (EQR) REIT.

● Pakistan and Afghanistan suffered a significant earthquake today, causing dozens of deaths at least. The magnitude 7.5 quake was centered in the far northeast of Afghanistan, flattening homes and damaging other buildings.

● Duke Energy (DUK) became the latest regional utility to acquire a natural gas distribution company. It will spend $4.9 billion in cash for Piedmont Natural Gas (PNY), a move that will add nat gas and propane businesses in the Carolinas, Tennessee and Georgia.

So what do you think about Zell’s transaction? Is the rental boom going to out? How about the latest utility sector deal? Or the downturn in industrial profits? If you have any comments about them, feel free to share them online.

Until next time,

Mike Larson