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By Alan Knuckman
March 29, 2011
Dear Penny Sleuther,
While many investors see bonds as boring investments for the risk- averse, the truth is that bonds can give traders a wealth of information about where other markets are headed. Today, I want to share how I look at the bond market to determine how to trade the commodity markets – and why bonds currently suggest more bullishness is on the way in April.
I focus on options with my Resource Trader Alert readers, and for good reason. The most important thing to remember is that no catastrophic financial losses occur with a limited risk investment strategy. The absolute worst thing that can possibly happen is that the option expires worthless and the original premium paid is lost. Disappointing, but not a game changer…
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But asset allocation is only part of the risk/reward tradeoff – another crucial element is knowing when to be bullish. For traders, bonds can be an invaluable indicator of the risk that other market participants are willing to take. They can tell you when it makes sense to be bullish.
All commodity assets (viewed by the CRB index) have jumped since September 2010. As a result the appeal for guaranteed returns from Treasury Bonds diminished. Lessening financial fears and lower yields made the safe bet unattractive while resource markets were in bull mode.
Bonds are a very important indicator that often moves inversely to stocks or resource prices. The "flight to quality" phenomenon in times of crisis often illustrate the seriousness of events. Bonds are bought with funds that unwind from riskier plays in other markets. For the past few months bonds were sold for better returns elsewhere.
As an advisory service editor and former floor trader in 30-Year Bonds at the Chicago Board of Trade I often gravitate to the price action in treasuries. They tell a supply and demand story with the print on the screen. Is the flow of funds going into or out of the perceived safety asset based on current events?
Bonds, not stocks, are my first insight into the severity of an event. That's because stocks may react adversely to many, many inputs or just profit taking from a long hard run. In fact, immediately after the Japanese earthquake Friday morning the quotes told me more than the news as information was being gathered.
Earlier this month, after an immediate initial jump, both bonds and the U.S. Dollar backed down as stocks recovered from sharp losses to reclaim the S&P 1,300. VIDEO: 6 Penny Stocks to Own Right Now...
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The key was the fact that cash didn't dump into bonds on the first signs of fundamental weakness in the market. That means that the bulls still have staying power as we approach the first trading days of April at the end of this week.
Truly, the events in Japan have had devastating human effects. The concern for those impacted by the far-reaching results was felt personally with my parents in Hawaii celebrating my father's retirement. My early phone calls were unanswered as the tsunami was on its way to the island paradise. Fortunately this wave was minimal and everyone was simply moved to higher ground for safety.
More issues are developing with bonds as a good arbiter of the results for traders. In the meantime let's hope for the best possible recovery scenario for those affected in Japan.
It all comes back to commodities,
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Why Bonds Suggest More Bullishness in April is featured at Penny Sleuth.
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