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Sell Overpriced Bonds While You Still Have the Chance

Decreased political risk and Fed commentary are likely to negatively impact bond prices


On Monday, stocks jumped higher on the opening and, with small caps leading, held the gains throughout the day. Floor traders attributed the gains to a relaxation of tensions in Ukraine after reports Friday indicating Ukraine had destroyed part of an armored Russian column near the border.

A meeting of the foreign ministers of Russia, Ukraine, Germany and France began this weekend to discuss a potential ceasefire, but no announcement have been made yet.

The Dow Jones Transportation Average jumped a whopping 1.7% on the day. This indicator of better economic times to come was cited as an important catalyst for the broad market advance.

Dollar General (DG) made a bid for Family Dollar (FDO) that topped an offer made by Dollar Tree (DLTR) several weeks ago. DG jumped 11.6%, FDO rose 4.9%, and DLTR fell 2.4%.

At Monday’s close, the Dow Jones Industrial Average was up 176 points at 16,839, the S&P 500 rose 17 points to 1,972, the Nasdaq gained 43 points at 4,508, and the Russell 2000 led the pack, up 17 points to 1,157. The NYSE’s primary market traded just 600 million shares with total volume of 2.6 billion shares. The Nasdaq crossed a total of 1.6 billion shares. Advancers outpaced decliners on both exchanges by more than 3-to-1.

RUT Chart
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Chart Key

The Russell 2000 had a very strong day. Despite the fact that “the small-cap index could not climb above its 50-day moving average (1,159), which served as resistance,” which was pointed out by, the index broke through even more important resistance at its 200-day moving average at 1,146. And it closed a mere 2.79 points from the 50-day moving average.

TNX Chart
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The 10-year Treasury yield fell on Friday, challenging the 14-month low of Aug. 6. The lower yields (higher bond prices) have been blamed on a flight to safety by Europeans worried about the Ukraine crisis. And this chart indicates that a major support level has been broken. But if geopolitical risk subsides, bonds could be very overbought.


Success with common stocks this summer has been challenged by events in Europe and the Middle East. And yet new highs have been a regular occurrence. The July-August pullback of just 4.4% (see S&P 500 chart in Aug. 15 Daily Market Outlook) was stopped cold at a trendline that has held for over a year. This line graphically illustrates that even under adverse circumstances buyers are willing to pounce on stocks.

Today’s chart of the 10-year note, I believe, tells us bonds are very overpriced and should be sold. If the reason for the rise in bond prices has been heightened political risk, and that risk is now lower, then bond yields will rise and prices will fall.

At week’s end, the Fed will be commenting on yields with the probable result of a negative impact on bond prices. Sell bonds and bond funds now at these very high prices.

The Nasdaq broke to a new high Monday, and this, along with the advance of the Russell 2000, tells us that the soldiers are again leading and the generals (Dow and S&P 500) are slowing. It is time to invest in small and mid caps with emphasis on the leading group — biotech stocks. If you are not sure which stock to buy, iShares Nasdaq Biotechnology (IBB) is a good way to participate in this growth sector.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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