The bullish data released within the past few days solidifies the probability that the Fed will not have to go another round of quantitative easing (others may call it quantitative wheezing) but the data confirms that the economy may be bottoming here in the third quarter with a slight acceleration into the new year.

This is great news for stocks as our holdings are finding a great deal of traction since the data release but what about bonds?

Bob Farrell was the long time head of technical analysis for Merrill Lynch many years ago and he had a list of rules, of which the first three must be kept in mind regarding bonds, especially Treasury Bonds:

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras – excesses are never permanent.

This is a chart of the 20-30 year Treasury ETF “TLT”.   Its been in a primary bullish mode since the early 1980’s when Voelker broke the inflation spiral.  But in recent years the gains have accelerated and now the current yield is under 3% which means its primarily a capital gains trading vehicle now.  But just consider if the TLT were to eventually trade merely to the lows of last year?  That would mean a loss of at least 25%!  Can it happen?  Absolutely.  But your guess is as good as mine in terms of the timing but my guess is that it will be fast when the selling starts as investors will desperately want to lock onto their gains.

The selling of Treasuries will likely lead to the purchase of stocks and what I’ve referred to as the “Great Reallocation”.   Just keep in mind that its likely that good economic news will be the catalyst.

Long TLT