Wednesday, November 25, 2009

Bond ETF Under Accumulation

As long as we are talking Treasury yields today, I thought I would take a look at two charts that suggest that longer term Treasury yields are headed lower, and this should be a tradeable move, which means you won't have to "thread the needle" to make some money. In other words, I cannot imagine it being secular in the sense of lasting months, but several weeks would seem likely.

Before looking at the charts, I want to point you to two recent articles that I wrote on this topic:

Figure 1 is a weekly chart of the yield on the 10 year Treasury. It looks like yields will close the week below the down sloping trend line (prior breakout point) and the 40 week moving average. The implications of a failed breakout and a close below the 40 week moving average suggests much lower yields. In addition, 10 year Treasury yields will remain below the key monthly pivot at 3.432, which we have been talking about for 10 months now, for 4 months running.

Figure 1. 10 year Treasury Yield/ monthly

Conversely, we can look at figure 2, which is a daily chart of the i-Shares Lehman 7-10 year Treasury Bond Fund (symbol: IEF). As yields move lower, this fund or ETF moves higher. Volume bars are in the middle panel and the on balance volume indicator (with 40 day moving average) is in the lower panel. This ETF is under accumulation. The on balance volume indicator is making new highs and leading price higher. Price is breaking above the 200 day moving average today albeit on below average volume.

Figure 2. IEF/ daily

In light of the known divergence between the Treasury market and equities, today's developments are worth noting. With a stock market looking somewhat toppy and yields falling, I am inclined to interpret falling yields as economic weakness. Over the past 8 months, economic weakness has meant more economic stimulus and of course, Wall Street loves that stimulus. But now we have an equity market that has gained 60% plus in 8 months, and despite this fact, there is still much uncertainty regarding the recovery.

I guess there is a limit to everything (including the stimulus) and we shall soon find out.


Anonymous said...

Guy, Johnny, would you guys mind to post the Rydex information today's end? Thanks in advance...

dacian said...

D-Man here

"I guess there is a limit to everything (including the stimulus) and we shall soon find out."

I do agree on everything but stimulus; imo, stimulus is infinite!

thanks for the post

Johnny G. said...

As of Wednesday's close:

Bullish & leveraged: 581.71
Bearish & leveraged: 359.28
Ratio: 1.62

Money market: 1,487.83

On Tuesday the ratio spiked to 2.68. However there may have been a problem with the data, as Rydex reported negative assets for one of the inverse Nasdaq-100 share classes.

Anonymous said...

Maybe this is the "new normal"? Bonds and equities both rise and fall together?