Sonders on the Bond "Bubble", Hindenburg Omen

In her latest market commentary, Charles Schwab’s Liz Ann Sonders says she doesn’t see a “bond bubble” forming — but she does say that many investors have probably moved too much of their portfolios out of stocks and into bonds.

Sonders notes that Treasury bonds actually outperformed stocks in the 20-year period that ended at the end of the first quarter of 2009, a very rare occurrence that has likely been a big part of why investors have flocked to bonds. “I often hear this as the basis for portfolios now heavily overweighted in bonds versus stocks,” Sonders says. But she adds that that’s no guarantee that the trend will continue. In fact, historically, when such lengthy periods of bond outperformance have occurred, stocks have gone on to produce much higher returns than bonds in the next five years, Sonders says. “Although investors didn’t lose money in bonds, they missed out on strong stock returns by bailing on stocks at the trough of relative performance (like in March 2009),” she says.

“Investors must heed the call of rebalancing and remember that diversification is important both among and within asset classes,” says Sonders. “We’re not bond bubble blowers, but no one ever went broke taking some profits.”

Sonders also offers some interesting insight on the so-called “Hindenburg Omen”, a very bearish signal that was recently triggered. Sonders notes that one of the conditions that has to be in place for the Hindenburg Omen to be triggered is that “the daily number of New York Stock Exchange new 52-week highs and daily number of new 52-week lows must both be greater than 2.2% of total NYSE issues traded that day.”

While it appeared that condition was met on Aug. 12, when 92 NYSE stocks hit new highs and 82 hit new lows, Sonders says that’s misleading. Pointing to research from Bespoke Investment Group, she says that “most of the ‘stocks’ hitting new highs were hardly stocks at all. Practically all were closed-end fixed income securities, preferred stocks or some other form of fixed income product masquerading as stocks. In fact, of the 92 issues that hit new highs, only seven were common stocks! “

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