The recent pullback in the fixed income market is starting to put a dent in the long-term uptrend for the asset class. For the last six months, Treasuries and most corporates have traded upward in a very tight ordely channel.

As shown below in the chart of the Vanguard Total Bond Market ETF (BND), however, the bottom of the uptrend has been broken in recent days. Conversely, the 10-Year Treasury Yield broke above the top of its downtrend channel in recent days as well. If the pattern doesn't correct quickly, the technicals suggest that fixed income could be in store for some rough action going forward. (Click to enlarge)

Just in time for the weakest part of the calendar for equities and talk of Hindenburg Omens, double dip recessions and bond bubbles have gotten louder, putting the investment community on the alert. Weak housing data and a revision downward for second quarter GDP (that is sooo early year) coupled with a still poor labor market have investors pouring money into bonds and bond funds at a rate that is making many concerned about a bubble. To be sure, there is plenty of debt to buy, but yields on the 10-year Treasury touched 2.50% before a nasty Friday pushed them back over 2.6%. What if everyone is already fearful? Judging by Investment Advisor sentiment as well as Individual Investor readings among the lowest in 12 months, maybe everyone has already battened down the hatches and unlike the stifling heat of summer, the fall is a glorious celebration of the changing seasons. Historically, both the Presidential cycle and decennial cycle point to weak September through October markets, but ’80 and ’96 proved an exception to the rule. With everyone standing on the port side, it maybe time to begin leaning starboard.

As mentioned above, the markets are heading into the worst part of the year, August/September, which is usually worse during a mid-term election. For all the bad press about October, during a mid-term election returns have historically been positive (3 of 14 since ’52) with only 1976 –8.7% return the only large decline in the bunch. September and June have been generally poor during mid-term elections (this year, June was down over 5%). So far this year, the markets have followed the cycle, with only April’s positive return trumping the expectation for a modest decline. However, sentiment is rather poor right now as investors are getting used to the thought of selling stocks due to a poor economy and buying bonds. As Friday’s jump in stocks and decline in bonds demonstrated - don’t get too comfortable in a “sure thing” investment. Given the bearish sentiment, it is possible Sept. and Oct could flip-flop, with a positive September and a negative October heading into the election.