Will bear market rally end? Look at US T-bonds, gold

The 30-year US treasury bond broke out to a new all-time high, signalling the return of risk aversion. Other safe havens such as gold, silver and dollar too rallied last week.

A continued rally in safe haven assets could see the end of the bear market rally in equities and a global selloff. The intensity of the risk aversion can been seen by the fact that both gold and the dollar rallied last week. These two asset classes are generally inversely related.

But all is not lost for the bulls as the only asset class signalling doom and gloom now is the 30-year US treasury bond. Gold, silver, the dollar and 10-year US treasury still have to clear resistance levels to confirm the end of the bear market rally. A rise in prices in a falling market is called a bear rally.

More from Blogs

For the past several months the equity market has been falling only to rally somewhat last week.

[caption id="attachment_75791" align="alignleft" width="380" caption="Silver still has a few resistance areas to clear before it can overhaul its all-time high. Reuters"][/caption]

The bond tale: On Friday, 30-year treasury bonds rallied to a new high after the US released a poor employment report. A rise in bond prices results in a fall in interest rates. And falling interest rates at the long end signal a recession - as it indicates that businesses are unwilling to borrow at the long end and take long-term bets. Most long-term loans are taken for capital investments and a lack of demand for these loans does not augur well for the economy. It shows lack of business confidence.

The breakout of 30-year US treasury to a new high means that there is no overhead resistance. The result can be a continued rise in prices. A look at the 30-year chart clearly shows prices moving to a new high (Click here to view chart). However, other safe haven assets have not followed the 30-year treasury with the same velocity. The 10-year US treasury has still not made a new all-time high. (Click here to view chart)

Precious metals: Gold and silver too have not gone above their all-time highs. Silver is still a long way from its all-time high, but gold is close. We'd look at the prices of gold to gauge risk aversion in the global markets. The all-time high on gold was around $ 1,915 and a close above that would signal increased aversion to risky assets such as equities. (Click here to view chart)

The yellow metal closed at $1,886 an ounce on Friday.

Silver still has a few resistance areas to clear before it can overhaul its all-time high. The white metal closed at $43.28 on Friday and the immediate resistance level to clear is $44.50. Once that level is crossed silver can head to its all-time high near $50. (Click here to view silver chart). Remember, though, that all is not lost for the risk trade. It's possible that either gold or the 10-year US treasury can hit their previous all-time highs and then sell off. This can lead to a rally in the equity markets.

Dollar surprise: The rally in the dollar surprised several market players. All the indications were that the greenback index would fall below the 73.50 support level as the area had been hit several times. However, the rally in the dollar shows the intensity of risk-aversion. Note, however, that for risk aversion to play out the dollar has to rally above 75.45 and then some. The dollar index closed at 74.76 on Friday. (Click here to view dollar index chart)

It is important to note that the dollar and silver are not the best indicators of risk aversion right now. We should look at US treasuries and gold.

Copper: Last week we had mentioned that the equity markets could rally due a rise in copper. That's what happened. The equity markets follow copper with a lag. Notice that copper has not sold off a lot as the equity markets in the US fell. This raises the spectre that the selloff in equity may not continue. (Click here to view copper chart)

We would right now focus on the price action of US treasuries and gold to see where the equity markets will go.

George Albert is Editor at www.capturetrends.com