Saturday, August 06, 2005

Decennial Pattern in Bond Prices

My 2005 bond market forecast was constructed using two basic elements. The first was George Lindsay's theory of repeating time periods for bull and bear markets and the intervals between important highs and lows. The second was the decennial pattern in bond prices.

A bull market in bonds began in September 1981 and since then we have had two years "ending in 5": 1985 and 1995. The charts above are daily continuation charts for the T-bond futures for those years.

What has amazed me so far in 2005 is how closely the market has followed the average pattern of 1985 and 1995.

In 1985 the market made a high on January 30 while in 2005 the early high came on February 9. In 1985 the market then dropped about 6 points to a low on March 25 while in 2005 the market dropped about 8 points to a low on March 23.

The second big reaction of 1985 began on June 5 while in 2005 it started on June 3. In 1985 the market then droped about 6 points to a low on July 29 and made a slightly higher low on October 7. In 2005 the market has dropped nearly 6 points so far.

Next take a look at the chart for 1995. There was no early reaction that year. But the bonds did start an 8 point reaction on June 2, 1995 which ended on August 15, 1995. As I said earlier, in 2005 the market made a top on June 3 and so far has dropped about 6 points.

I expect the decennial pattern to continue its influence on bond prices for the rest of the year and possibly into 2006. From this hypothesis I draw two conclusions.

First, the bond market rally that began in May of 2004 from the 103 level in the bond futures is not over. I expect the market to rally into the 121-123 range by the end of the year. I should point out that the reactions of 1985 were followed by a bull market top on April 16, 1986 while the big reaction of 1995 was followed by a bull market top on January 4, 1996.

Secondly, the reaction that began from the top at 119-23 in the bonds on June 3, 2005 is nearly over. The 1985 reaction ended on July 29 and a slightly higher low occurred on October 7 while the 1985 reaction ended on August 15.

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