The (Potential) Bullish Case For Bonds
Jay Kaeppel | Sep 28, 2018 02:10PM ET
OK, first the bad news. In terms of the long-term, we are probably in the midst of a rising interest rate environment. Consider the information contained in Figure 1 from McClellan Financial Publications.
Figure 1 – The 60-year cycle in interest rates Courtesy: mscoscillator.com
Though no cycle is ever perfect, it is only logical to look at Figure 1 and come away thinking that rates will rise in the years (and possibly decades) ahead. And one should plan accordingly, i.e.:
*Eschew large holdings of long-term bonds. Remember that a bond with a “duration” -Google that term as it relates to bonds please – of 15 implies that if interest rates rise 1 full percentage point then that bond will lose roughly 15% of principal. Ouch.
*Stick to short to intermediate term bonds (which will reinvest at higher rates more quickly than long-term bonds as rates rise) and possibly some exposure to floating rate bonds.
That is “The Big Picture”.
In the meantime, there is a potential bullish case to be for bonds in the shorter-term. The “quick and dirty” guide to “where are bonds headed next” appears in the monthly and weekly charts of ticker iShares 20+ Year Treasury Bond (NASDAQ:TLT) (iShares 20+ years treasury bond ETF). Note the key support and resistance levels drawn on these charts.
Figure 2 – Monthly TLT with support and resistance Courtesy ProfitSource by HUBB
Figure 3 – Weekly TLT with support and resistance Courtesy ProfitSource by HUBB
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There is nothing magic about these lines, but a break above resistance suggests a bull move, a break below support suggests a bear move, and anything in between suggests a trading range affair.
Now let’s look at some potentially positive influences. Figure 4 displays a screen from the excellent site sentimentrader.com that shows that sentiment regarding the long treasury bond is rock bottom low. As a contrarian sign this is typically considered to be bullish.
Figure 4 – 30-year treasury investor sentiment is extremely low Courtesy Sentimentrader.com
Figure 5 – also from sentimentrader.com – suggests that bonds may be entering a “bullish” seasonal period between now and at least late-November (and possibly as long as late January 2019).
Figure 5 – 30-year treasury seasonality Courtesy Sentimentrader.com
Figure 6 displays the 30-year treasury bond yield (multiplied by 10 for some reason). While rates have risen 27% from the low (from 2.51% to 3.18%), they still remain below the long-term 120-month exponential moving average.
Figure 6 – Long-term treasury bond yields versus 120-month moving average Courtesy AIQ TradingExpert
Finally, two systems that I developed that deems the bond trend bullish or bearish based on the movements of 1) metals, and 2) Japanese stocks turned bullish recently. The bond market has fallen since these bullish signal were flashed – possibly as a result of the anticipated rate hike from the Fed. Now that that hike is out of the way we should keep a close eye on bonds for a potential advance in the months ahead.
Figure 7 – Bonds tend to move inversely to Japanese stocks; Ticker EWJ 5-week average is below 30-week average, i.e., potentially bullish for bonds Courtesy AIQ TradingExpert
h3 Summary/h3It’s a little confusing here.
a) The “long-term” outlook for bonds is very “iffy”, so bond “investors” should continue to be cautious – as detailed above.
b) On the other hand, there appears to be a chance that bonds are setting up for a rally in the near-term.
c) But, in one final twist, remember that if TLT takes out its recent support level, all bullish bets are off.
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