Treasury Prices and Yields Blindside the Masses – What’s Next?

Last month, 10-year yield above 3% was all the rage. Since then it has dropped more than 8%.

The April 25 Profit Radar Report commented as follows on 10-year yields:

The topic of 3%+ 10-year Treasury yields has captivated the media, and the media writes what retail investors are interested in. For example:

  • CNBC: Market is obsessed with 10-year yield
  • MarketWatch: Here’s why stock market investors are focused on a 3% 10-year yield
  • CNNMoney: Why everyone is stressing about the 10-year Treasury yield

This kind of fascination is usually reached towards the end of a trend. Commercial hedgers (smart money) are heavily betting on rising 10-year Treasury bond prices (bond prices are inversely correlated to yield, rising bond prices = falling yield).

The 10-year yield chart (TNX) doesn’t look healthy. RSI-2 is overbought, RSI-35 is diverging bearishly. This doesn’t mean TNX will have to drop tomorrow, but indicators suggest up side is very limited and down side risk elevated.”

The May 6 Profit Radar Report featured the chart below, which offers a more comprehensive look at 30-year Treasury prices (price and yield move in the opposite direction). Shown are:

  • Investor sentiment (commercial hedgers’ exposure – bottom panel)
  • Seasonality (blue chart insert at top right)
  • Elliott Wave Theory labels

The 3 most important Treasury indicators we watch (technicals, sentiment & seasonality) all suggested higher prices.

The iShares 20+ year Treasury Bond ETF (TLT) shows how this buy signal played out.

Short-term, TLT is overbought (RSI-2), and susceptible to a pullback. But, RSI-35 confirmed this rally and suggests that any pullback will be followed by more gains.

Continued updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Are Treasury Bonds Carving out a Major Top?

The multi-decade Treasury bond bull market reached another all-time high in July.

The June 12 Profit Radar Report put 30-year Treasuries bonds on our ‘major market top watch list’ when it published the chart below and stated:

30-year Treasury futures climbed to a new all-time closing high while commercial hedgers (smart money) have racked up record short exposure. Seasonality is about to hit a weak spot. Bearish RSI divergences exist on various time frames. We will be looking for an opportunity to short 30-year Treasuries.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

It took a little while for this trade to ‘ripen,’ but the July 27 Profit Radar Report featured this recommendation:

The July 17 PRR stated that: ‘30-year Treasuries may bounce a bit to perhaps give us a second bite at the cherry.’ This bounce materialized this week, and Treasuries reached one of two targets (173’27 and 175’10) that should lead to a down side reversal.

We will leg into this short 30-year Treasury trade with half a position. Investors can short via futures, short TLT or buy the Short 20+ Year Treasury ETF (TBF). We will likely deploy the second half of this trade if Treasuries rally into the second target.”

Treasuries never rallied to the second bounce target, but instead started stair stepping lower.

We closed the short Treasuries position when trade first touched the 200-day SMA on September 13.

Treasuries started to rally shortly thereafter. This rally brings Treasuries to an inflection point.

Inflection Point

From the July high to the September low, Treasuries seem to have traced out 3 waves (according to Elliott Wave Theory – EWT).

Based on EWT, a 3-wave move is a counter trend move, while a 5-wave move usually marks are trend change (or trend continuation in other cases).

This means that the bounce from the September low is either:

  • Wave 4 followed by a wave 5 decline to new lows. This would suggest that the July high is a major top (red number labels).
  • The beginning of another rally leg following a complete 3-wave correction (green arrow).

If the rally from the September low is a wave 4, it should stop near the red resistance line or the black trend channel. Some may argue that the rally has gone too far already to be considered a wave 4 bounce.

While this doesn’t remove all ambiguity, the wave counts give traders some helpful directional clues, such as:

  • Going short is risky while trade remains above the September low
  • Buyers should dial back risk on a drop below the September low
  • A move above 170 and 171 should lead to more gains

The Profit Radar Report monitors dozens of indicators to identify low-risk or high probability setups for various asset classes.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

What Does the Junk Bond Meltdown Mean for Stocks?

In the land of the blind, the one-eyed man is king.

In the land of low interest rates (ZIRP), high yield junk bonds are king. Never mind the additional risk. At least that’s how it used to be.

But reality has a tendency to make unexpected appearances, and it certainly made its presence known to yield hungry and risk ignorant junk bond investors.

Starting in June 2014, junk bonds turned sour.

The Profit Radar Report doesn’t often touch on junk bonds, but the July 5, 2015 Profit Radar Report mentioned junk bonds’ role in a developing bear market:

The Greek drama is fueling a fair amount of crisis talk. We anticipate an equity correction soon and a full-blown bear market eventually (2016?), but that doesn’t mean other asset classes can’t turn down sooner.

Economic recessions are a diffuse process, not a sudden all-encompassing event. Investors with money in high yield funds should watch support levels and exercise appropriate risk management.

The SPDR Barclays High Yield Junk Bond ETF (JNK) is trading near support at 38.21. A break below support should be a warning for junk bond investors.”

JNK lost 20% since June 2014, and 13% since violating support at 38.21.

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It looks like junk bonds have entered a bear market already.

JNK may catch a bid around support at 33.30, but there are no bullish divergences. A move above the lower trend channel line is the minimum requirement to pause the selling for more than a week or two.

The junk bond decline has robbed investors (particularly retirees) of yet another income source.

Yes, economic recessions are a diffuse process, and junk bonds may be one of the first asset classes to drift into a new bear market.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Stocks Overvalued Compared to Bonds

There was a minor bond scare as prices tumbled and yields soared.

The drop in bond prices makes bonds more attractive relative to stocks, at least that’s what the SPY:TLT ratio says.

SPY represents S&P 500, and TLT the iShares 20+ Treasury ETF (NYSEArc: TLT).

The chart below, first published in the May 20 Profit Radar Report, plots the SPDR S&P 500 ETF (NYSEArca: SPY) against the SPY:TLT ratio.

 

The SPY:TLT ratio soared to a new all-time high last wee, facilitated by a strong SPY and weak TLT.

The red lines show that SPY:TLT extremes tend to have a wet blanked effect on the S&P 500, although it doesn’t necessarily translate into a buy signal for bonds.

There is strong technical support for 30-year Treasury futures around 152. This should pause the decline and quite possibly spark a (sizeable?) bounce.

As far as the S&P 500 goes, the SPY:TLT wet blanked effect might be enhanced by the biggest ‘window of opportunity’ for stock market bears to take charge.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Could a Bearish Corporate Bond Pattern Sink the S&P 500?

Investors have been finding plenty of reasons to turn bearish on stocks. Here could be another one: A rising wedge pattern for corporate bonds. Is there enough of a correlation between bonds and stocks to tip the scales?

Corporate bonds are carving out a potential bearish pattern (more details below). Is there enough of a correlation between corporate bonds and the S&P 500 to make this worrisome for stock investors?

Figure 1 shows the correlation between the S&P 500 and the iShares iBOXX $ Investment Grade Corporate Bond ETF (NYSEArca: LQD).

The relationship between S&P and LQD runs hot and cold, vacillating between taking the same path and parting ways.

Some have argued that there was a bearish divergence before the 2008 crash, similar to the bearish divergence right now.

This is true, but the interest environment prior to 2007 was different than today, and we know that interest rates affect bonds (and stocks).

Is it possible to make an apples to apples comparison between 2007 and today?

Figure 2 takes interest rates into consideration. The lower graph reflects LQD divided by the 10-year Treasury yield (TNX), which is then plotted against the S&P 500 (upper graph).

At first sight, there are no meaningful parallels between the LQD:TNX ratio and the S&P 500 (NYSEArca: SPY).

However, the LQD:TNX ratio seems to adhere to trend line support and resistance. For example, LQD:TNX has been climbing higher based on the green support trend line and has been kept lower by two resistance trend lines.

Since the LQD:TNX ratio is butting against resistance, it may be interesting to explore what happens if the ratio breaks higher.

This may be the most valuable clue offered by the chart: Generally when the ratio spikes (green arrow), the S&P 500 slides (exception: February 2013).

An LQD:TNX ratio spike would be caused by falling interest rates and/or rising LQD prices.

But here is another caveat: Corporate bond ETFs (represented by LQD) are developing a bearish technical pattern that suggests an upcoming bull trap and fairly significant decline.

This interesting dynamic is discussed in more detail here:

Corporate Bonds Inching Towards Bull Trap Territory

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Corporate Bonds Inching Towards Bull Trap Territory

2014 has been the year of bull traps, here’s another trap under construction: Corporate bonds, represented by the iShares iBOXX $ Investment Grade Corporate Bond ETF, paint a fairly clear technical picture.

The iShares iBOXX $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) is at or near an interesting inflection point.

LQD has been climbing higher in a rising wedge formation. Although there is no specific price barrier, a rising wedge typifies a scenario where buying pressure progressively weakens.

Here is where things get interesting: The wedge pattern often culminates with a throw-over top. Such a throw-over top would align well with resistance (more below).

A throw-over top is a brief spike above the upper (red) resistance line. This bull trap is designed to get investors to buy into the market just before it’s getting ready to sell off (a common down side target is the beginning of the wedge).

Here is how the wedge pattern could play out for the iShares Corporate Bond ETF (LQD):

Wedge resistance is currently at 118.30. Fibonacci resistance (61.8% from the October 2012 high) is at 118.44. The February and March 2013 lows are around 118.70. This forms a resistance cluster at 118.30 – 118.70.

If LQD adheres to the guidelines of a rising wedge pattern, a brief spike into the 118.30 – 118.70 resistance cluster could be followed by a decline back to 113. Sustained trade above the upper wedge line would warn that the pattern is a no go.

The charts for other bond ETFs like the iShares Core Total U.S. Bond ETF (NYSEArca: AGG) look similar.

If you are like me, you wonder how corporate bonds affect the S&P 500 (SNP: ^GSPC).

Here’s a detailed look at how corporate bonds affect the S&P 500 in general and what a corporate bond fund break down would mean the for the S&P 500 right now.

Could a Bearish Corporate Bond Pattern Sink the S&P 500

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.