First Hint of Soaring Bond and Commodity Yields Now Appears in Overseas Equities :: Elliott Wave International
In 2020-early 2021, the “fundamental” future for bond yields and commodities looked “gloomy”. But then came the big “reflation”. Here is the “wonderful” reason why!
by Nico Isaac
Updated: August 17, 2022
This weekend, I finally crossed off my bucket list a long-desired hike: the famous Tallulah Gorge in North Georgia. I arrived at 8am sharp and was immediately handed a waiver to sign, promising not to sue in the event of a painful and giddy death. Then the tiny ranger said, “Don’t break your leg!” opened the door and led me to the bottom of the 1000 foot high vertical canyon floor.
I craned my neck to see the almost imperceptible cliff edge above, shrouded in a thick canopy of rhododendrons and cascading waterfalls. I breathed in the crisp mountain air and began the grueling ascent over smooth, river-worn rocks and 1,099 steel steps to the top.
And then, an hour and two very sore shins later, I beheld one of the most breathtaking sights of my life, pictured here:
In Elliott Wave analysis, this staggering, heart-pounding surge is the equivalent of the third wave in a five-wave impulse pattern. Described by Ralph Nelson Elliott himself as “wonders to behold”, the third waves are strong, wide and unmistakable. They are often the most volatile point of strength in any wave sequence and can produce uncontrollable price movements.
Here is an idealized diagram of the third wave:
Equal to their magnitude, the clarity that third waves bring to a market’s trend is unmistakable. If you see one in a bullish setup on a price chart, it’s like you’re standing at the bottom of that steep rock face, waiting for a powerful push to great highs.
(And conversely, if a third bearish wave appears, well, you know it’s time to sign that waiver insuring against a precipitous drop!)
So let’s look at concrete examples of third waves in the recent price action of two major markets. First, the Bloomberg Barclays Global Aggregate Yield Index, a flagship global bond index, at the end of 2020.
At the time, at the height of the global pandemic, a massive exodus from risk was underway and yields across global bond markets were falling to historic lows. Essentially, investors were paying banks to store their money. Wrote a March 6 CNBC:
“It’s a brave the new world of handles 0 and we have now started to benchmark 10-year yields in terms of basis points. 1.0%, thanks for the memories.”
On July 3, Reuters published a column titled “The end of obligations as ballast” and wrote:
“The problem for many investors is that the pandemic shock has finally caused safe bond yields to fall so close to zero that they have nothing to do with performance in another downturn in the 5-10 coming years.”
And as 2021 began, the Oracle of Omaha Warren Buffett himself issued this “lament” in his annual letter to investors:
“Fixed income investors around the world – whether pension funds, insurance companies or retirees – facing a bleak future.
“Bonds are not the place to be these days…while the yield on 10-year Treasury bonds has fallen 94% since September 1981.”
But instead of a “better new world” of 0 handles, our late 2020 Global Market Outlook publications began to adopt a sweeping counterclaim. In the December 2020 Global Market Outlook, our analysis identified an almost complete impulsive five-wave decline in the Bloomberg Barclays Global Aggregate Bond Index and warned that an “extremely significant low” is about to form.
At the end of 2020, bond yields started to climb slowly and steadily. In the December 2021 Global Market Outlook, our analysis confirmed that five waves had indeed been made and that a new upward trend change in yields was underway. Specifically, the Bloomberg Global Aggregate Bond Index was at the bottom of a third wave higher. From December 2021 GMP:
“In terms of Elliott Wave analysis, our modus operandi is that the Bloomberg Barclays Global Aggregate Bond Index return is just beginning wave 3 on the upside. If this is correct, we can expect that yields across all sectors of the bond markets continue to rise well in 2022.”
And, this next chart captures the near-vertical ascent to multi-decade highs that followed as the third wave gained momentum.
Now, let’s look at another market that embodied the awesome power of the third waves. We come back to the December 2020 Global Market Outlook and see his analysis of the Invesco DB Commodity Fund. There, we identified a “third of a third wave” underway and said it was a strong signal that commodities as a whole are “in the early stages of a long-term bull market”.
A steep climb followed at the right time. Then in the January 2022 Global Market Outlook, our analysis has focused on commodity price consolidation at the end of 2021, prompting mainstream pundits to call the “end of the commodity boom.”
Our analysis led to a different result: a new third wave of advances had begun in the uptrend of the Invesco DB Commodity Index:
“As we enter 2022, there are growing doubts about the ability of commodities to continue rising as an expected slowdown in economic growth, particularly in China, and a rebound in supply will likely weigh on prices,” Bloomberg reported on Dec. 31.
“These doubts support our view that commodity prices will continue to surprise most bullish observers..”
And, this next chart plots the two entry points for the third wave on the DBC chart:
These two examples speak loud and clear of the “wonderful” nature of third waves. And now in the August 2022 Global Market Outlook, we identify three dozen third-wave setups in a band of global markets, including:
- ChiNext index
- Shenzhen composite
- Shanghai composite
- Straits Times Index
- Nikki 225
- India’s Nifty 50
- ASX all ordinary
- South Korean KOSPI
- Taiwan Index
- US Copper Index Fund
- WNS Holdings
- And more
So put on your figurative hiking boots and get ready for literal opportunities in our Global Market Outlook service.
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