Wednesday, August 18, 2010

If This Were A Stock....

See figure 1 a weekly price chart. The 40 week moving average (i.e, red line) is heading higher, and prices are trading above key pivot points, which are areas of support (buying) and resistance (selling). In essence, this is a "beautiful" chart with lots of momentum (i.e., note the breakout gaps). If this were a stock, the analysts and pundits would be all over the "breakout" ---blah, blah, blah.

Figure 1. Price Chart/ weekly

But figure 1 isn't a stock, it is the yield on the 30 year Treasury, and the chart has been turned upside down. What I hear and read is this move in Treasury bonds isn't sustainable. A sub 3% yield isn't possible, but isn't that what "they" said about a sub 4% yield? Which happens to be in the rear view mirror.

People still don't believe, and they are not interpreting the significance of the price action correctly. Maybe if this were a stock people would be wowed by the price action. But they aren't. For the record, figure 2 is a weekly chart of the yield on the 30 year Treasury bond (symbol: $TYX.X). Are the low yields of late 2008 the next stop?

Figure 2. $TYX.X/ weekly

In up coming commentaries, I will have more on why I think this move is even more sustainable than most analysts are currently anticipating. I last wrote about this secular theme on July 8, 2010: "The Case For Treasury Bonds".


ryanmburke19 said...

I sold out of my TLT long from March of this year monday and today. While I think that it is a good secular play, the sentiment numbers on the bond from DSI are pretty extreme (98%). It reminds me of the dollar bullishness in May. While I took some profits into that bullish orgy, I held on to most of that position and rode it back down. I will be looking for a level to re-enter in the months ahead. Too frothy for me here. The only thing that gives me pause about having sold is the number of traders I know long TBT.

Guy M. Lerner said...

Understood....I should have mentioned in the article that the short term looks very overbought but the gyst of the article is about how bullish the upside down chart looks over the longer term yet "most" still are ignoring the price action

Onlooker said...


Well said. All this bond bubble talk is really kind of funny. Even those who would tell you not to try to judge the stock market based on fundamentals are now saying these levels on bonds are not justified and must go down, etc.

And of course this is has been the broad consensus for year after year now. And yet, here we are. And then there's Japan, which of course has differences but still shows what can happen in a deflationary environment with a strong currency, etc. And our domestic saving rates are only going up, helping support the bond market.

Now don't misunderstand me here either. I wouldn't load up on long bonds either, but a shorter duration portfolio with a mix of strong corporates thrown in (like the Vanguard Total Bond Mkt fund or the TSP F fund) are a whole different story. I'm convinced by Dave Rosenberg's thesis and am long the TSP F fund and gold/miner shares.

I think this market will continue to confound the majority for quite some time before finally really going into a secular bear.