Back in late-June, I took a bearish posture on the bond market. Why? Certainly the signs of renewed optimism in the housing sector were a concern, and the large government deficits seem almost mandatory to ultimately be inflationary. But the biggest reason is the monthly chart of the 30-year Treasury bond yield below. Remember that the bond yield moves inversely to the actual price of bonds. When yields are coming down, that bullish for bond prices, while a rising bond yield means bonds are dropping.

You'll notice a couple of indicators on the chart. The first is the 21-month stochastic (in red) which has dropped down near the 20% oversold level. The last two times that yields were this oversold, in late-2001 and mid-2003, bond yields surged and hurt bond holders.

The more important indicator in my opinion is the 20-month Acceleration bands plotted in red around the TYX yields. Notice how each time the TYX touched the lower Acceleration Band, it invariably popped back up. Or the one time the TYX caught the upper Acceleration band, that marked the end of a major rally. While technically we did not quite touch this lower band just under 4.20% in late June, but technicians will recognize the double bottom at 4.2%. Past surges in yields (and thus drops in bond prices) have not last more than about 6 months or less, which puts our target timeframe out in January 2006.

On the chart, note how the 4.6% yield level is key and has acted as resistance for yields thus far as they come back up. But we think that 4.6% will be overtaken and yields will head back to the 5.00% area. Each of the two past snaps back up crossed one strong bar above the 20-month moving average before peaking out. There's an outside chance yields could move back up to 5.5% but we'll stick to our conservative 5.00% target. Even that 10%+ rise in yields (and thus 10%+ drop in bond prices) will have a slowing effect on the upgrading cycle in the housing market, and likely lead to problems for those on adjustable rate mortages longer-term if rates stay up. The bottom line is the fallout for stocks and the economy is likely to be significant over the next year, and housing stocks are a natural area for bears to profit from the cooling of the housing surge, if not outright popping of the bubble.

Click here to view the 30-Year Treasury Bond Yield chart (a new browser window will open).

Price Headley is the founder and chief analyst of BigTrends.com.