Is the Bond Market the Next Bubble?

Would that Signal a Bottom for Penny Stocks?

Every market has a bubble. Those bubbles exist, whether the market goes up or down. Because we have all heard the saying that “There is a bull market somewhere”. Right now that bull market is in the bond market. Investors have been drawn to this asset class for many different reasons. For some it was the “flash crash” for others it’s been poor returns in equities. The poor economy, and high unemployment are other factors in the interest
in debt market.

This interest is so evident that it’s basically flattening the yield curve and the 10 year yield is nearing the January, 2009 low. Investors are also pouring money into debt mutual funds at alarming rates. My sense is that this could signal a bottom in the equity market. History has shown us time and time again that when retail investors pile into a sector or an asset class, it’s probably near or at the top. It doesn’t matter whether it’s municipal bonds or mining penny stocks. If Joe Public is over weighted a shift the other way has usually been around the corner.

Now why could this be a contrarian indicator to go long microcap stocks ? Well it’s simple. Part of the reason for the light volume in the market has been the shift to bonds. For example if Investor A buy an equity mutual fund. That mutual fund will trade and add volume to different exchanges. Now if that same investor moves those equity funds that were reserved for risk into a high yield bond fund for instance.That simply takes volume away from exchanges like the NYSE and that lack of volume trickles down to the OTCBB. It’s simple macroeconomics.

Since many of us have lived through the internet bubble and others too. You probably get the drift. If history repeats itself, investors will not see the returns that they are looking for in bonds. As evidenced in the past, many of these same investors will eventually shift this money back into the equity market. To me this provides some buying opportunities in the area of penny stocks. The lull in volume has impacted many of these tiny companies. Some have become relativly cheap based on nothing other than lack of interest. Keep in mind that heavy volume is the way low priced companies turn into hot penny stocks. Unfortunately, some of the funds that provide that volume are tied up in bonds. This call might be a little early, but eventually, those funds should come back to stocks. Just be patient.