Bonds

I had thought that the August 8 low ended the reaction from the June 3 top in the bond market.

As you can see from the daily chart of the December bond futures above I was completely wrong about this. The question now is whether or not a new bear market has started.

My 2005 bond market forecast had predicted a top for August 2005 and a drop into late 2006. So far the market's top occurred on June 3 making the bull market from the May 2004 low barely 12 months in length. The last three bull markets lasted 18 months (April 1997- October 1998), 22 months (January 2000 - November 2001) and 15 months (March 2002 - June 2003).

This is one reason why I think my "up to 121-123" forecast still has a good chance of bearing fruit. The other is that very few people see any chance of a sustained rally in bond prices from here given the unfriendly stance of the Fed.

In any event, I think the market is at a juncture which will soon tell me whether my bullish view can be sustained.

On the chart I have drawn boxes for the drop from the June 3 top in red. The bottom of the current box is at 111-30. Moreover, at 112-10 the drop from the post Katrina top at 118-10 will equal the length of the June-August drop. So I think that the rally I have been expecting will have to begin from around these levels. If it does it will give the entire drop from the June 3 top the appearance of a "zig-zag" downward which is quite standard for corrective trends within bull markets.

Any significant weakness below the 112 level will be evidence that the rally into the 121-123 zone that I have been expecting will not occur until the next bull market begins.