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.

 

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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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Two Inversely Correlated Asset Classes Provide Lifeline and Noose for S&P 500

U.S. equities are part of an intricate global financial ‘ecosystem.’ They do not trade in a vacuum. As part of something bigger, U.S. equities are subject to certain correlations, which provide clues about U.S. stocks’ next move.

U.S. stocks do not trade in a vacuum; they are part of an intricate ‘ecosystem’ of worldwide financial markets.

As with any ecosystem, financial markets adhere to the ‘cause and effect’ principle.

Just like there’s a correlation between birds of prey and the mice population or bees and pollination, there are correlations between specific financial markets (some are directly correlated, others are inversely correlated).

Understanding market correlations/connections can be helpful in forecasting stock market movements.

Some of those financial ecosystem correlations are:

  1. U.S. stocks (or S&P 500) and the Japanese yen
  2. U.S. stocks (or S&P 500) and U.S. Treasuries

S&P 500 vs Japanese Yen

Due to the carry trade, the yen has become an important force for the S&P 500.

As part of the yen carry trade, U.S. investors borrow yen to buy U.S. stocks. The yen can be borrowed cheaply and U.S. stocks have delivered juicy returns in recent years.

Courtesy of Japan’s Prime Minister Shinzo Abe, a falling yen makes paying back the yen even cheaper and has made the carry trade even more attractive.

A rising yen would have the opposite effect on U.S. stocks.

The Japanese Yen Futures chart below shows the yen butting against double trend line resistance and the 200-day SMA.

S&P 500 vs 30-Year Treasuries

Bond investors have a reputation to be smarter than stock investors. I like to monitor 30-year Treasury bond prices (corresponding Treasury ETF: TLT) as they tend to have an inverse correlation to the S&P 500.

On April 2, 30-year Treasury prices found support at the green trend line. The April 2 Profit Radar Report stated that: “30-year Treasuries have reached near-term support. Prices tend to respond to such trend lines, so a bounce is possible. A bounce for Treasuries would provide headwinds for higher stock prices.”

30-year Treasury Futures bounced from support and now trade above double trend line resistance. This bullish breakout (assuming it sticks), suggests lower prices for U.S. stocks.

Although those charts don’t tell us the up side potential for the yen and Treasuries (or down side risk for the S&P 500), they do tell us that we are at a pivotal point in time.

The S&P 500 (NYSEArca: SPY) chart confirms the message of yen and Treasuries and provides clear ‘points of ruin’ or must hold support levels.

Here is the most important near-term support level:

Don’t Get Fooled by This S&P 500 Bounce

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.

How TLT ETF Unnecessarily Fooled S&P 500 Investors … and May Do So Again

Like detectives, investors are always searching for clues about the market’s next move. Unfortunately some clues turn out to be misleading. A false Treasury ETF (TLT) breakout just sent investors in the wrong direction … and may do so again.

I’m a big fan of ETFs, but when analyzing an asset class, the analysis should be based on the purest representation of that asset class.

A number of technical analysts spotted a bullish TLT breakout on March 27. TLT is the iShares 20+ Year Treasury ETF (NYSEArca: TLT).

On March 28 I published the article “Beware of False TLT Treasury ETF Breakout and S&P 500 Breakdown.”

TLT’s breakout appeared like a ‘fake out break out’ because the 30-year Treasury Futures (ZB), a purer representation of Treasuries, didn’t confirm the breakout.

The first two charts below (featured in the March 28 article) show the discrepancy between TLT and ZB.

In short, TLT is above resistance (green bubble), ZB is well below important double resistance.

The performance of 30-year Treasuries can be a powerful tell tale sign, as Treasuries often move in the opposite direction of the S&P 500.

A Treasury breakout would likely have coincided with an S&P 500 breakdown.

The third chart zooms in on 30-year Treasury futures (ZB) and highlights the performance since March 28 in blue.

We see that ZB was rejected by resistance, but more importantly, ZB is now trading right on top of short-term green trend line support (green arrow).

This means that it will probably takes a drop below support to unlock lower prices for ZB and higher prices for the S&P 500.

Just like 30-year Treasuries have found support, the S&P 500 is dealing with key resistance.

This S&P 500 resistance is revealed here and may well change the way you look at the S&P 500:

S&P 500 – Stuck Between Triple Top and Triple Bottom – What’s Next? (Article #4)

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.

Beware of False TLT Treasury ETF Breakout (and S&P 500 breakdown)

The long-term Treasury ETF (TLT) just saw a technical breakout above resistance. This is bullish for TLT (and bearish for stocks), but it may be a premature fake out. Here’s how to get confirmation for a real Treasury breakout.

A number of technical analysts believe to have identified a bullish technical breakout for the iShares 20+ Year Treasury ETF (NYSEArca: TLT).

The TLT Treasury ETF chart below highlights Thursday’s breakout (green bubble).

At first glance, TLT’s push above resistance qualifies as a breakout.

TLT314

As great as ETFs are, I personally prefer to use the purest representation of an asset class as a foundation for my analysis. For long-term Treasuries, that’s the 30-year Treasury Futures (/ZB).

The 30-year Treasury Futures chart looks slightly different. Trade has not yet broken above resistance.

TLT314

Both charts include all (trend line) support/resistance levels and how prices reacted (blue bubbles).

TLT has been more prone to false breakouts or breakdowns than futures.

This doesn’t mean 30-year Treasury futures won’t break out. Bullish TLT action may act as a magnet and pull prices higher. The prudent approach is to wait until futures confirm TLT (especially sinse TLT’s breakout didn’t occur on highly elevated volume).

The action of Treasuries may also provide important clues for the S&P 500 (SNP: ^GSPC). The S&P 500 has been stuck in a rut for all of 2014 and a Treasury breakout may coincide with an S&P 500 breakdown.

Just as Treasuries have to confirm a bullish breakout, the S&P 500 has yet to confirm a break down.

This following article features the messiest S&P 500 chart I’ve ever published. But ironically it may explain the stock market’s up-and down better than any other chart:

Short-Term S&P 500 Forecast

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.

Fed Needs Help of its Worst Enemy to Unload QE Assets

Talk about a classic catch 22. The Federal Reserve has been buying Treasuries to depress interest rates and spark the economy. With a bloated balance sheet, the Fed needs the help of its arch enemy to unload assets.

1,273%. That’s how much the Federal Reserve’s balance sheet has mushroomed since 1990.

As of January 22, the Federal Reserve owns $2.228 trillion worth of U.S. Treasuries and $1.532 trillion worth of mortgage-backed securities.

Various other holdings bring the Fed’s balance sheet to $3.815 trillion.

The chart below provides a visual of the sharp balance sheet increase since 2008.

Buying those assets is the easy part, but how will the Fed unload them?

The Fed’s Enemy – Who?

The Federal Reserve engaged in massive quantitative easing (QE) to depress interest rates. Low interest rates forced investors into stocks and defrosted the frozen credit markets.

By extension, QE drove up stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA). Bernanke termed this the ‘wealth effect,’ which the Fed hoped would spill over into the economy.

The Fed’s biggest enemy is interest rates, rising interest rates to be exact. Particularly important is the 10-year T-note yield.

Rising interest rates make Treasuries and Treasury Bond ETFs like the iShares 20+ Year Treasury ETF (NYSEArca: TLT) more attractive than stocks.

Rising interest rates also result in higher loan and mortgage rates, which are speed bumps for the economy and real estate.

The chart below, published on December 12, plots the S&P 500 against the Fed’s balance sheet and 10-year Treasury Yields. Yields are inverted and the chart shows that the Fed has lost control over yields.

How The Fed’s Arch Enemy Can Help

The Federal Reserve is the biggest buyer and owner of Treasuries. The Fed can print money and buy securities all day long.

But, who will end up buying all the Treasuries the Federal Reserve has amassed? What happens when the Fed becomes the seller? The Fed can’t print buyers. There has to be a demand or the Fed (if possible) has to create a demand.

Irony at its Best

What makes Treasuries attractive? High yields, which ironically is exactly what the Fed is trying to avoid. High yields are bad for stocks and bad for the economy, but may be the Fed’s only hope to eventually unload assets.

There’s another caveat. High yields translate into lower prices. As yields rise, the Fed’s Treasury holdings – and Treasury ETFs like the iShares 7-10 Year Treasury ETF (NYSEArca: IEF) – will shrink.

Are there other alternatives? How about doing nothing and let the free market do its thing. Perhaps that’s what Bernanke and his inkjets should have done all along.

There is another problem largely unrelated to QE and the Federal Reserve. It’s ownership of U.S. assets (not just Treasuries).

We know that the Federal Reserve owns much of the Treasury float, but more and more U.S. assets are falling into the hands of foreigners. More and more U.S. citizens have to ‘pay rent’ to overseas landlords.

Here’s a detailed look at this economically dangerous development:

US Assets are Falling into the Hands of Foreign Owners at a Record Pace

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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.

What’s Next? Bull or Bear Market? Try Gorilla Market

Right or wrong? The QE bull market will last as long as the Federal Reserve keeps QE going. A majority of investors say ‘Yes,’ but a curiously sophisticated experiment and powerful data suggest a surprise outcome.

In 2004 Daniel Simons of the University of Illinois and Christopher Chabris of Harvard University conducted a fascinating experiment.

If you want to be part of the experience take a minute (it literally only takes a minute) and watch this video before you continue reading.

To get the full effect, watch the video first and don’t read ahead.

If you don’t want to watch the video, here’s a quick summary:

Truth in Simplicity

The experiment is quite simple. There are two groups of three people each. One group is wearing black shirts, the other group white shirts.

The three people wearing black shirts are passing one ball to fellow black shirts; the ones wearing white shirts are doing the same. So there are six people, passing two balls.

The assignment is to watch how many times the players wearing white, pass the basketball.

It’s a simple assignment that requires some concentration and a clear mind.

The answer: The white shirts pass the ball 15 times.

But wait, there’s more. Many viewers get the number of passes right, but completely overlook a woman dressed in a gorilla suit. The gorilla walks slowly across the scene, stops to face the camera, and thumps her chest.

Half of the people watching the video did not see the gorilla. After watching the video for a second time, some of them refused to accept that they were looking at the same tape and thought it was a different version of the video.

“That’s nice, but what’s your point Simon?” Good question.

The Invisible 800-Pound Gorilla

The experiment was supposed to illustrate the phenomenon of unintentional blindness, also known as perceptual blindness. This condition prevents people from perceiving things that are in plain sight (such as the bear markets of 2000 and 2008).

Much of the media has zeroed in on one singular cause for higher or lower prices. Sample headlines below:

Reuters: Wall Street climbs as GDP data eases fear of Fed pullback
Reuters: Brightening jobs picture may draw Fed closer to tapering
Reuters: Wall Street slips amid Fed caution

The media is busy ‘counting passes,’ or watching Bernanke’s every word and interpret even the slightest variation of terminology.

The Fed’s action is the only thing that matters, but amidst ‘counting passes,’ many overlook the gorilla.

Gorilla Sightings

It’s believed that a rising QE liquidity tide lifts all boats. This was impressively demonstrated in 2010 and 2011 when various asset classes and commodities reached all-time highs. It only conditionally applies to 2012 and 2013 though.

In 2011 gold and silver rallied to nominal all-time highs. Why?

  1. The Fed pumped money into the system (aka banks) and all that excess liquidity had to be invested somewhere, anywhere, including precious metals.
  2. Fear of inflation. Gold is known is the only real currency and inflation hedge. Silver rode gold’s coattail and became known as the poor-man’s gold. From 2008 – 2011 gold prices nearly tripled and silver went from $8.50 to $50/ounce.

Since its 2011 high, the SPDR Gold Shares ETF (NYSEArca: GLD) has fallen as much as 38.29% and the iShares Silver Trust (NYSEArca: SLV) was down as much as 63.41%.

This doesn’t make (conventional) sense or does it. QE or the fear of inflation didn’t stop in 2011. In fact, QE (and the associated risk of inflation) is stronger than ever. Based on the above rationale, the gold and silvers meltdown is inconceivable and unexplainable.

The QE ‘Crown Jewel’

Initially QE was limited to government bonds or Treasury bonds. In other words, the Federal Reserve would buy Treasuries of various durations from banks and primary dealers with freshly printed money.

The effect was intentionally twofold:

  1. The Fed would pay top dollars to keep Treasury prices artificially inflated and interest rates low.
  2. The banks would have extra money to ‘play’ with and drive up asset prices, a process Mr. Bernanke dubbed the ‘wealth effect.’

With that thought in mind, take a look at the iShares 20+ year Treasury ETF (NYSEArca: TLT) chart above.

From the May peak to June trough TLT tumbled 14.56%, more than twice as much as the S&P 500 (7.52%).

Lessons

The lessons are simple:

  1. QE doesn’t always work and can misfire badly.
  2. We don’t see every gorilla (or looming bear).

All this doesn’t mean that the market will crash tomorrow. In fact, the stock market doesn’t exhibit the tell tale signs of a major top right now and higher highs seem likely.

Unintentional blindness is real and often magnified by the herding effect. The investing crowd (or herd) is convinced that stocks will go up as long as the Fed feeds Wall Street.

The above charts suggests that we shouldn’t follow this assumption blindly.