When Money Moves Out of Bonds - What does it prefer? Big Caps, DIA or Small Caps, IWM

Hi All,

I hope to get Billy, Pascal and Mike Scott's reaction to this because they have commented on money moving out of TLT, bonds in general, etc. Others with an opinion, please comment as well.

In this latest CANSLIM rally from the Dec 20, 2011 rally day until what appears to be now the end, I have noticed great progress (RS) in QQQ's, but frankly, IWM, and even more particularly $XVG which is an excellent index for the average stock, have not made much progress since the end of Jan 2012. The lower cap ETFs and indexes have been range bound, lagging in RS, etc.

Also, I have noted the Macro themes commented on by the moderators on this site re: Money rotating out of bonds, and Kevin Ferry, bond trader (Cornus and on CNBC), has said the top is in on long term bonds.

The last few months have presented evidence and I think its somewhat common sense (at least as I see it) that an investor/trader who is coming out of the bond market is likely to prefer perceived safer and less volatile equities, like large caps, perhaps dividend stocks, etc, and not likely to move into small caps. Add to this the benefits of large caps experiencing better RS over the last few months, and it's hard for me to favor and want to trade small cap names over big caps, until I see contrary evidence, like IWM outperforming SPY for more than a couple of days.

Also, the bond markets is 2-3X larger than equity markets ([url]http://en.wikipedia.org/wiki/Bond_market[/url] vs [url]http://en.wikipedia.org/wiki/Equity_market[/url]) so, it seems like the jet fuel is in the tank once we get through this corrective move.

My action from this analysis is to wait for the bottom to be put in, and then look to take moderate positions in highly liquid, large cap ETF's, e.g. DIA, perhaps some Tech focused once (I guess QQQ's qualify)

Thoughts?

Shawn

It's important to clarify what sort of time frame we're talking about when discussing the possibility of money moving out of bonds and into stocks. The EV charts are short-term in nature so far as I can see and not particularly useful in calling a change in what has been a 30+ year trend (bonds bottomed in 1980-81).

There have been several commentators over the past few years that have suggested the top in bond prices is in, and all have been proven wrong. Most recently UBS came out with a piece calling the top and so far they look, like the others, wrong. The group that has been spot on throughout is Van Hoisington and Lacy Hunt, who continue to invest their fixed income portfolios in maximum duration govies.

I, for one, am a skeptic on a top in bonds having been made until a coherent and credible plan is put in place both here in the U.S. and Europe to deal with all the debt. Perhaps that happens this year if the "fiscal cliff" the U.S. is facing by year-end is dealt with by Congress, and a growth strategy in Europe is agreed to by Germany.