TLT: Still Constructive

When we last looked at long term Treasury bonds, it was on March 16, 2011, and I stated that "the technical and fundamental picture are both positive for higher bond prices."  The fundamental bond model that I have developed is based upon intermarket data, and this model is still constructive on bonds although there has been a wobble or two this week.  The technical picture is weak as well as prices have faltered but not broken our key levels.  This article will be a review of the technical picture. 

Before looking at some figures, let me ask the following questions: why care about bonds at all?  After all, don't equities have the support of the Federal Reserve?  Why invest in "riskless" assets when all the rage is to invest in risk assets?  Aren't bonds over valued (i.e., yields are too low)?

My interest in bonds is because they act as a great diversifier.  They are poorly correlated to equities.  From all my work with constructing portfolios, there is no question that a well timed bond purchase will enhance gains and reduce risk.  Of course, the purchase has to be well timed, but that is the point of developing models and quantifying the technical picture.  Yes, there should be a generational push to higher yields (as bonds are overvalued), but honestly, I have been hearing about that trade for over 2 years now.  Higher yields will be here some day, but it isn't looking like that today.

Figure 1 is a weekly chart of the i - Shares Lehman 20 plus Year Treasury Fund (symbol: TLT).  Key support levels are noted by the black dots, and the red labeled price bars within the gray ovals are positive divergence bars.  $89 is the support level going back almost 2 years.  A significant break below these levels would be the signal for lower bond prices (or higher yields).

Figure 1. TLT/ weekly

Figure 2 is a daily chart of TLT with the on balance volume indicator in the lower panel.  The low pivot is at 88.46, and more importantly, the breakout above the down sloping trend from two weeks ago is still holding above the trend line.  The on balance volume indicator is trending higher (i.e., higher lows).

Figure 2. TLT/ daily

In summary, my out look on long term Treasury bonds remains constructive.