This bond market signal indicates the bear market isn’t over yet

• As I said before, bond investors are much more savvy and smarter than stock investors as the former is much less emotion-charged but more deeply in the fundamentals of the companies. So when they send a different signal, you better pay attention to it. Don't be fooled by the stock market sentiment and ignore the bond market signals. Let's first see what the bond market was telling us in Jan when the stock market was making new highs every day.

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• The 10-year bond yield had topped in the mid of Jan, a major warning signal that something devastating was coming but who in the stock market cared? They pushed the market to new highs day after day, so-called melting up till early Mar when it finally crashed by over 30% within days! OUCH!!
• Even more telling, the bond market was bottomed a couple of weeks before the stock marketed finally stopped bleeding, a truly MASTER leading indicator!
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• That's why bonds are called a canary in a coal mine!  If you don't know the backstory… In the early 20th century, coal miners discovered that canary birds could be used as an early warning signal for the presence of toxic gases. When the canary got sick, or died even, that was the miners' cue to evacuate the mine. So by carefully watching what the bond market is doing, it may help to detect imminent disaster in the financial markets. So what the bond market is telling us now? BE CAUTIOUS!

• Stock markets have rallied in recent days, fueled by unprecedented monetary and fiscal stimulus from central banks and governments, and efforts to reopen economies following prolonged lockdowns. In a note Monday, Longview argued that high-yield corporate bond spreads have signaled the end of every cyclical bear market since they started being recorded in 1997.
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• "On this occasion, credit spreads are not confirming the end of the bear market. Over the last 6 - 7 weeks, the S&P 500 has rallied 34% from its intraday lows. Credit spreads, though, are little changed (tightening from 19.4pp (percentage points) to 17.6pp)," the note said.

  "That type of muted price action in credit is normal during equity market relief rallies within a bear market."

• As a bear market nears its end, credit spreads narrow aggressively as the equity markets rally, Longview economists said. Within seven weeks of the end of the bear market that originated during the global financial crisis in 2008, spreads tightened by more than 10 percentage points, they flagged.  
  

• To put it in a plain English, the bond market is telling us that the danger in the stock market isn't over yet and it still sees a high risk existing at the moment. Of course do what makes you most comfortable with and you can totally ignore this warning. Just don't panic if indeed the next major selloff is coming!! 

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