To OTC Journal Members: 
 

One More Bubble and Fabulous Friday

We just might be in for a little rally in the markets. Yesterday could only be described as "Fabulous Friday"- it will be looked back as a highly pivotal day in this our bottoming process. First, let's look at the latest big bubble.

Here's the next big bubble, and like all others before it, this one will burst and the right side of the waterfall decline will be ugly. Also, like all bubbles, it's impossible to say how high it will go before it reverses course and goes into the toilet (see oil as an example).

This improbable bubble is the ETF that trades up in conjunction with the US Treasury known as the "Long Bond". Long Bonds are US Treasuries that mature a long ways out- any US Treasury over 20 years to maturity is considered a "Long Bond".

The Long Bond has recently enjoyed a meteoric move up. Bonds are instruments that pay interest. Therefore, the higher the price goes, the lower the yield- or rate of interest.

The US Treasury Long Bond, at its current market price, yields about 3% if held to maturity. That is lowest rate of return in the history of the Long Bond. Owning this bond implies the holder is prepared to accept a 3% safe return for the next 20 plus years. Makes no sense to me.

The chart you are looking at represents a "flight to quality" that is totally irrational. I don't know when, but I believe I can safely predict the spike you see on this chart is eventually going to give way to a waterfall decline on the other side. 

When the money comes out of the Long Bond, it will be headed for stocks, and the market will get much healthier.

And, speaking of a healthier market..... check out the action in the S&P 500 on Friday, which I believe will be looked back on as a pivotal day.

Here's an hourly chart of the S&P 500 depicting the action on Friday. Pre open, the November job loss report came out from the Labor Department. In the month of November, the US economy lost 533,000 jobs. It was the worst jobs report since 1974, and the fifth worst jobs report in history.

In September, October, or November, this jobs report would have sent the DOW down 600 points. Instead, the DOW gained 259 points, or 3%. How could this be?

Glad you asked- I'll tell you. Sellers are simply exhausted. There are no more supplies to hit the markets. The forced liquidations have about run their course. The horrendous condition of the US economy is already priced into the market.

When the jobs report didn't bring out another giant wave of selling, short sellers had to be disappointed. The shorts are looking for this kind of news to take profits- the same way you and I look for great news to take profits in our long positions.

When the market didn't completely fall apart, shorts starting covering and drove the market to a close higher than it's opening level. The S&P 500 came up from a low of 820 to close at nearly 880. What a move. The short interest is the rocket full that will eventually push the market higher. 

We're getting to the end of the bottoming process- you can tell, because the market goes up on bad news. Friday's jobs report was so bad there had only been 4 worse reports in history, Yet, we closed higher.

The market is working its way into rally mode. I, for one, can't wait.

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