US Treasury bonds and notes have been range bound for over six months.

There is reason to believe that Treasuries, especially 30-year Treasuries bonds, will soon break higher. Why?

Smart Money

Commercial hedgers – a group of traders considered the ‘smart money’ – are buying Treasuries across the bond curve in anticipation of higher prices.

The chart below shows commercial hedgers’ aggregate net exposure to 5, 10, 30-year Treasuries (blue graph).

As the green arrows show, hedgers’ bullish bets are generally vindicated by a period of rising prices.

Below is a list of ETFs likely to benefit from the bullish developments seen by commercial hedgers. Long-term maturities are more dynamic and subject to bigger price moves.

  • iShares Short Treasury Bond ETF (NYSEArca: SHV)
  • iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY)
  • iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI)
  • iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF)
  • iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT)

Seasonality

The green chart insert shows that seasonality is generally bullish for the remainder of the year.

A move above the red resistance lines is necessary to unlock an up side target of 129 – 133. This up side target is based on Fibonacci retracement levels (50% and 61.8%) and an open chart gap.

Sustained trade below 120 would put any rally on hold.

Above analysis was initially published in the August 26 Profit Radar Report. Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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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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.

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.

 

3 Important Things to Know When Investing in ETFs

ETFs are cost effective, tax efficient, liquid and can be traded throughout the day (unlike mutual funds). Most investors are familiar with the appealing ETF basics, but here are a few tricks and traps the average Joe investor may not know.

ETFs (Exchange Traded Funds) have been called the best thing since sliced bread.

The ETF universe has ballooned to well over 1,300 ETFs, controlling nearly $2 trillion in assets. The $15 trillion mutual fund industry is less than thrilled about the splash ETFs made in their investment pool.

ETFs are popular for a reason, but this article addresses not only the ETF basics, it also reveals some tricks and traps the average investor may not be aware of.

ETF Basics

Know what’s under the hood: The initial success of broad market ETFs, like the SPDR S&P 500 ETF (NYSEArca: SPY), sparked much innovation and the need for additional ETF structures.

Today there are five different ETF structures, each with its own pros, cons, and tax treatment. In fact, in recognition of this diversity, what used to be called the ETF universe, has become the ETP (Exchange Traded Product) universe.

A detailed look at the different structures along with advantages and disadvantages is available here: Basic ETF Structures Explained

Diversification:  Most ETPs provide exposure to a basket of stocks or bonds. Most often that basket is linked to an index.

Some ETPs screen their holdings based on certain filters, are actively managed or designed to track the performance of commodities, currencies are other assets classes.

Cost & Tax Advantages: There are exceptions, as you would expect in any group numbering over 1,300, but ETPs in general are more cost and tax effective. The cheapest S&P 500 ETFs costs only 0.05% per year.

Liquidity: ETPs sell like stocks and can be instantly (assuming the market is open and you have a brokerage account) bought or sold with the click of a button. Mutual funds are redeemed (time delay is at least a few hours), often at a price that has yet to be determined.

ETF Tricks & Traps

Like every other investment, ETPs don’t come with a built in protection against moronic decisions.

The emergence of short, leveraged and leveraged short ETPs actually makes it easier for investors to lose (and make) money even faster. The epitome of a two-edged sword.

Due to the structure of short and leveraged ETPs, the odds of landing a profitable trade are not always 50/50.

Some leveraged (short) ETPs have a tendency to enhance returns in a down market, others in an up market. Sideways markets may deliver unpredictable returns, even returns unrelated to the underlying benchmark.

For example, the popular but notoriously declining iPath S&P 500 Short-term VIX ETN (NYSEArca: VXX) has been a trap for many investors.

The first chart below plots VXX against its benchmark, the VIX. I’ve inserted a 50-day SMA to show the basic trend. VXX has been down even though VIX has been trading predominantly sideways.

The second chart plots VelocityShares Daily Inverse VIX ETN (NYSEArca: XIV) against its benchmark, which is also the VIX.

You probably get the point. The choice of ETPs can influence the odds of winning beyond the normal odds dealt by the market.

More details about the subtle, but important idiosyncrasies of ETPs is available here: The Must Know Basics of Short & Leveraged ETFs

Know Thy ETF Universe

With over 1,300 ETPs comes the freedom of choice. The following criteria should be considered when on the prowl for the best ETP:

  • Cost
  • Trading volume
  • Performance track record
  • Structure and tax advantages/disadvantages
  • Tracking method (sampling or replication) and accuracy

ETPs also offer exposure to asset classes and currencies that, in the past, used to be off limits for the average investor. So take a stroll through the ETP universe. You may find asset class ‘galaxies’ that may harmonize with your portfolio on planet Earth.

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 to get actionable ETF trade ideas delivered for free.

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.

Stock/Bond Ratio Projects Exciting Times Ahead

Are stocks ripe for a deeper correction or is the 5%+ January hiccup – the biggest in well over a year – already in the rearview mirror? The stock/bond ratio provides a dimension not often considered.

The S&P 500 (SNP: ^GSPC) just had its first 5%+ correction in well over a year.

Some say that’s bullish, because it brought prices down to levels that spark new buying. Others point to a potentially bearish technical breakdown at a time when stocks are over-loved, over-valued, and over-hyped.

Which one is true?

As the old saying goes, there are always three sides to an argument: His, hers and the truth.

The stock/bond ratio provides another dimension to this ‘argument.’

We use the SPDR S&P 500 ETF (NYSEArca: SPY) as proxy for stocks and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) as proxy for bonds.

The S&P 500 ETF – SPY/IEF ratio chart below shows the SPY/IEF ratio vacillating between support and resistance.

The SPY/IEF ratio rises when the S&P 500 moves higher and bonds move lower.

A spike in the SPY/IEF ratio accompanied every S&P 500 high. This includes the most recent January high.

However, the SPY/IEF ratio did not touch resistance at the most recent high. It also didn’t touch support at the most recent low.

Nothing says that resistance or support need to be met, but often such support/resistance levels act as magnets.

If the SPY/IEF ratio is still in need of touching both support and resistance levels, as a result, we conclude that the January high didn’t mark a major top and last week’s low didn’t mark the end of this correction.

Obviously, this would translate into exciting times ahead.

A detailed forecast for the S&P 500 is provided here:

S&P 500 Forecast: Short-Term Gains vs Long-Term Pain

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.