The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Important Signal for Stocks and Bonds?

From Gavekal Capital, we have a very interesting chart comparing the performance of stocks vs. bonds. That ratio is now the highest since the peak of 2007, and about equal to the peak of 2011.The 2007 peak preceded the big bear market in stocks and the global financial crisis of 2008.

Here is an excerpt:

Over the last two quarters stocks have outperformed bonds by 31%, which is the greatest outperformance by stocks since 2011. Only in 1999 did stocks outperform bonds by a wider margin over a two quarter period. There we have that 1999 comparison again.

This chart says that over the long-term, the relative performance of stocks and bonds fluctuates around the zero line. When the graph goes to an upper or lower differential maximum, there is a reversion to the zero line.

In 1999 the line exceeded for a short time the maximum of the 25 year period displayed. That was obviously the time to sell stocks and buy bonds. We have a feeling that the upper region will be penetrated again as in 1999, with stocks going to an extreme just before a major top.

This would set up another very profitable trade: short stocks and long bonds. However, it’s too early to prepare for that now.

Our view:  Given our analysis suggesting that the economies are weakening again, in spite of the still huge stimulus of the major central banks, we believe that an important and surprising shift in the markets will happen this year.

That would mean an end to the Trump rally and optimistic expectations while the US president is continued to be attacked from all sides of the radical left. The letdown in the economic optimism will cause business expansion plans to be shelved. Money mangers will start raising cash and shifting from stocks to bonds.

Our technicals on the bond market are giving preliminary clues of a good bottom to be followed by a nice up move as money goes to safety.

The above ratio chart of bonds vs. stocks confirms that the ratio is at an important high for stocks. This means that agile and active investors who get the best guidance will have some great opportunities this year. We will keep you posted in our award-winning WELLINGTON LETTER, now in its 40th year of excellence.

You can read more of our current analysis and forecasts on the global stock markets, bond markets, and global economies in our award-winning WELLINGTON LETTER, now in its 40th year.

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