Hamilton's E-Wave Analysis

LQD , Investment grade corporate bond ETF, Feb 2010.

Bonds are assumed to be the safe part of the portfolio, however we tend to forget that, just using a few examples, on the morning of Oct 19 ,1987, Government bonds in the US moved 22 full points in hour or two, enough to wipe out good number of participants. It did almost immediately retrace half of that. We also tend to forget that both Enron in the US and Confederation Life here in Canada were AAA corporate entities the very morning they failed.

Bond trading has two main components, one is duration risk and the other credit risk. It may seem tough to guess where interest rates are going but it is a lot easier than guessing where individual credit might go, which is perhaps why the individual bond trader tends to stay with the Government bonds. It is on the retail side that arguments are made why corporate bonds are a good buy. Here is the chart;

Notice that both and MACD (not shown) are already negative and have been for sometime. Notice also that the lows occurred at the time of the Lehman problems back in October and did not coincide with the stock market lows in March of last year. This rally is now approaching 1 and 1/2 year. From EW perspective the entire rally could be an a-b-c irregular correction (not shown), or a last 5 waves up to complete a 32 years bond rally to zero. In the latter case a small triangle could be forming allowing for one more push to about 107 (see the pink pattern). I doubt it. In terms of buying low and selling high, this definitely does not fit the bill.