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.

Advertisements

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.

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.

Bond / S&P 500 Ratio Suggests Bonds Are Undervalued

Boring or exciting, tortoise or hare, bonds or stocks? There are different ways to figure out when to overweigh stocks over bonds or vice versa. This indicator shows the value of bonds relative to the S&P 500 Index.

Boring or exciting, tortoise or hare, bonds or stocks?

A low interest rate environment generally favors stocks as investors flee from fixed-income vehicles into higher-octane stocks.

This has been a winning strategy. The SPDR S&P 500 ETF (NYSEArca: SPY) is up 25%, compared to a 3% loss for the iShares Barclays 7 – 10 year Treasury Bond ETF (NYSEArca: IEF).

However, one indicator suggests that 10-year Treasury bonds are about to catch a bid.

The indicator is the ratio between the S&P 500 Index (SNP: ^GSPC) and the iShares Barclays 7 – 10 Year Treasury Bond ETF (IEF).

The chart below plots IEF against the S&P 500 : IEF ratio.

The red arrows highlight extremes in the S&P 500 : IEF ratio. More often than not an extreme in the ratio has coincided with lows for IEF and Treasury bonds in general, which includes the iShares Barclays 20+ Year Treasury ETF (NYSEArca: TLT).

The S&P 500 ETF : IEF ratio as a bullish indicator for Treasury Bonds however, is in conflict with our technical analysis for the 10-year Treasury Note yield.

The longer-term trajectory for the 10-year rate seems to be up.

The second chart of the 10-year Treasury Note yield (Chicago Options: ^TNX) shows that yields have broken above a short-term resistance trend line, which seems to put yields on track to surpass their September high (see chart annotations for previous Profit Radar Report analysis).

In an ideal world all indicators always point in the same direction, but when is market analysis ever ideal? It even takes some hindsight to pinpoint actual ratio extremes highlighted above.

The indicators may be telling us that there’s some short-term weakness for bond yields followed by a period of rising 10- year yields (with a target above 3%).

Does the S&P 500 : IEF ratio also apply to the S&P 500 Index?

A chart that plots the S&P 500 against the S&P 500 : IEF ratio can be found here. Although the chart isn’t failproof, it sends a message that shouldn’t be ignored. View S&P 500 vs S&P 500 : IEF ratio chart here.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

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

 

S&P 500/Bond Ratio Shows Stocks are Overvalued

Much has been written about the ‘great rotation’ from bonds into stocks. In reality, investors ask themselves every day if there’s more value in stocks or bonds. There’s one accurate measure to determine where’s more value.

Stocks or bonds? Essentially that’s a decision investors make every day.

As with pretty much every other purchase, investors want to get the biggest bang for their buck and avoid risk. In other words, risk/reward is key.

What’s the better risk/reward play right now? Stocks or bonds?

To find out we will take a look at the value of the S&P 500 Index relative to 10-year Treasury prices. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is used as proxy for 10-year Treasuries.

The chart below plots the S&P 500 Index against a ratio attained by dividing the S&P 500 against the price of IEF (S&P 500:IEF).

This is one of the easiest and most effective ways to determine the value of both asset classes relative to each other.

The chart shows that S&P 500:IEF ratio extremes put the kibosh on stocks every time. The degree of the correction varied, but the direction for the S&P 500 was the same every time – down.

There is one problem though.

It usually takes hindsight to determine what constitutes an S&P 500:IEF ratio extreme.

The ratio, although extreme right now, could become more stretched. Will it?

The dashed horizontal gray line shows today’s ratio in correlation to prior readings. In fact, the ratio is at a point where it turned down in early 2007 and early 2008. This appears as natural resistance for the ratio … and the S&P 500.

The S&P 500:IEF ratio suggests that risk is increasing for the S&P 500.

This harmonizes with the S&P 500 chart, which conveys the message that stocks are at a short-term inflection point. This article highlights some technical ‘speed bumps’ most investors aren’t aware of: What’s Next For the S&P 500?

 

The Most Important Number in Finance is Falling … For Now

What’s the most important number in the financial world? You could ask Congress … but of course they couldn’t agree on it. The most important number in finance pulls almost every financial market in its wake. One more hint: The Federal Reserve (thinks it) is in control of it.

What is the most important number in finance?

GDP, unemployment rate, consumer confidence, or CPI?

The most important number in finance is the 10-year US Treasury Yield (Chicago Options: ^TNX).

When this number changes, almost every other number in finance changes.

The 10-year yield nearly doubled since May. The 7-10 Year Treasury Bond ETF (NYSEArca: IEF) dropped as much as 10%, a huge move for Treasury Bonds. The iShares Barclays 20+ Treasury Bond (NYSEArca: TLT) fell as much as 16%.

With rising yields came higher mortgage rates. But it doesn’t stop there. The yield rally also stifled stocks’ performance in two ways:

1) Low interest rates make bonds less attractive to investors and force them to move into stocks (NYSEArca: VTI). Bernanke calls this much-desired side effect the ‘wealth effect’ (although it robs retirees of their income).

2) Rising interest rates cause higher loan rates for businesses. This puts a squeeze on the profit margin and ultimately the stock price.

Yes, the 10-year yield is arguably the most important number in finance and therefore the chief target of Bernanke’s QE programs. The Federal Reserve buys its own Treasury bonds in an attempt to drive interest rates lower.

In the financial heist game it’s called an inside job.

Ironic QE Revenge

Ironically for much of 2013, the 10-year yield has been revolting against its puppet master (the Fed). The almost unprecedented 2013 yield rally is the opposite of the Fed’s objective.

The chart below plots the S&P 500 against the 10-year Treasury Yield.

1) The green box highlights the unwanted, unexpected and unprecedented yield rally.

2) The solid red lines marks yield resistance mentioned by the September 8 Profit Radar Report: “Yields have been rising dramatically, but may be at or near a top (at least a temporary one). As long as yields stay below 3%, odds are starting to favor falling yields and rising Treasury prices.”

Yields tumbled as much as 12% since.

3) The dashed red line shows what the S&P 500 (NYSEArca: SPY) has done since the meteoric yield rally: The S&P 500 is essentially flat and has been range bound since May. Apparently QE money is still finding its way into stocks, but rising yields prevented further gains for stocks.

4) A closer look at the correlation shows that rising yields are not always bad for stocks and shouldn’t be used as a short-term indicator.

Yield Outlook

The long-term trend for the 10-year yields seems to have changed from down to up. Over the short-term, yield may drop a bit further to digest the recent rally.

As the U.S. politicians are ‘impressively’ demonstrating (debt ceiling battle), U.S. Treasuries are not without risk. Even if/once an agreement is hammered out, the long-term futures for Treasuries doesn’t look bright.

As mentioned earlier, the Federal Reserve is deliberately inflating Treasuries. At one point the much-feared taper will begin. Via a brilliant preemptive move – probably in an effort to deflect responsibility – the Federal Reserve has already warned of a market crash (not caused by the taper of course). More details about the Fed’s market crash warning can be found here:

Surprising Fed Study – Is it Warning of a Market Crash?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.