Bonds Sold Friday, but are now Really Oversold

On Friday we quoted Bob Carver regarding the bond market and its potential reaction to the employment report as follows: "If the bond market has taken his prediction to heart and the numbers turn out to be weaker than they expect, we could finally get that countertrend bond rally we've been looking for. And, that would certainly help the stock market rally as well. On the other hand, a very strong Employment Report could forestall such a rebound in bonds. At the present time, bonds are extremely oversold, so it will be quite instructive to watch the reaction of bonds to the report. " On Friday bond yields initially retreated as media called the employment numbers a "Cinderella Report" where numbers were not too hot, not too cold, but just the right mix to get the Fed to lay off future rate hikes. Bond traders took this initial enthusiasm as a chance to short though and rates soared causing a strong intraday reversal in the stock and bond markets alike. Note Bob's commentary: "…interest rates, which had appeared immune to Fed rate hikes up until the last few months, are soaring in a "bull market". When rates soar, bond prices drop and that causes the relative yield advantage of stocks over bonds to narrow. It also increases the cost of doing business and that reduces earnings. Thus, the result is that when interest rates trend higher, an extra "drag" on stock prices is introduced. When the drag becomes too large, selloffs result. Friday was one of those occasions. Bonds initially rallied on the Employment Report, but short sellers hammered that market, sending interest rates soaring and stocks came tumbling after, just as we warned you would happen. " Bonds, which were oversold on Friday before the further sell off are now very oversold however and we are even closer to that relief rally predicted, which should give stocks room to continue the uptrend shortly. Look for an initial follow through lower today, which could then easily reverse as more bears are trapped as they once again miscalculated the top in this market. Trying to pick and short a market top is a lot like the old story about the boy who cried wolf. Eventually the wolf is going to arrive and eat the sheep but there will be a lot of false warnings that occur before that happens.