Review Of US 10-Year Bonds
Eric De Groot | Dec 27, 2015 01:49AM ET
A series of interest rates cuts and a reduction in reserve requirements by China and numerous 'competitive' currency devaluations, suggest not only a quiet panic behind the velvet ropes of leadership but also a coordinated effort to reignite growth within an increasing stagnant global economy.
While coordinated 'stimulus' supports a countertrend rally of commodities foreshadowed by negative concentration discussed months ago, it won't reverse defensive global capital flows regardless of the hype. Defensive money flows likely includes US Treasury bonds and US 10-year bonds until the wolf pack culls the herd of weak European and Asian debt. The pack will thin the herd from the periphery (emerging markets, Asia, and Europe) towards the core (United States) economy. Government bonds, the previous cycle's safe haven, could transition to mark up as the global economy turns down and world panics; gentleman could prefer government bonds, notes, and bills at least in the initial stages of the next panic.
Complacency towards longer duration bonds, however, should turn to fear. What Mellow omitted is that investors prefer the public sector (bonds) when confidence in the private sector (stocks) is failing. Investors preferred bonds in 1929 because confidence in the private sector was failing. While gentlemen should prefer bonds once again, they'll like turn on them with a prejudice not seen in generations as confidence in the public sector and leadership behind the curtain falters. This will turn complacency into fear rather quickly.
Price
Interactive Chart: IEF
A positive long-term trend oscillator (LTCO) defines compression and up impulse from 106.95 to 105.95 since the second week of December (chart 1). The bulls control the non-trending trend until reversed by a bearish crossover. Compression (white circles) generally anticipates this change. This technical setup favors the faders and tightens risk management for the bulls.
A close above 110.55 jumps the creek and transitions the trend from cause to mark up. A close below 99.20 breaks the ice and transitions the trend to mark down.
Chart 1
Leverage
A positive long-term leverage oscillator (LTLO) defines a bear phase since the second week of November (chart 2). The bear phase, a conflicting message from the leadership of leverage and price, tightens risk management for the bulls (see price).
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A diffusion index (DI) of 27% defines Q3 distribution (chart 3). A capitulation index (CAP) of 34% confirms this message (chart 4). DI and CAP's trends, broader flows of leverage and sentiment from distribution (red dotted line) to accumulation and extreme complacency (red dotted line) to fear supporting the bears (green arrows), should not only continue to extreme concentrations but also restrain upside expectations until reversed.
Chart 2
Chart 3
Chart 4
Time/Cycle
The 5-year seasonal cycle (orange series) defines weakness until the end of the year (chart 5). This path of least resistance restrains upside expectations (see price).
Chart 5
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