TIPS: A Good Thing!

I first mentioned Treasury Inflation Protected Securities or TIPS in an article on August 28 when I noted that "the TIP's ETF has "broken out" as it appears to be attracting the interest of investors." Since that time, the i-Shares Lehman TIPS Bond Fund (symbol: TIP) or TIP's ETF is up 3%.

Figure 1 is a daily chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) with volume bars in the middle panel and the on balance volume indicator (with a 40 bar moving average) in the lower panel. On Monday, price hit a new closing high for the move, and the OBV indicator is leading price higher. This is good.

Figure 1. TIP/ daily

So you say, "So, what is the big deal?". The S&P Depository Receipts (symbol: SPY) is up 6% over the same time frame.

As it turns out, SPY is twice as volatile as TIP, and in the current market environment, my money management strategy would be to hold a position in TIP that is twice the cash value of the SPY. So in essence, with this position in TIP, I have not underperformed.

Furthermore and to the benefit of my portfolio, TIP is poorly correlated with the SPY on 156 week, 52 week and 26 week time frames. A position in TIP has not hurt my portfolio performance, and in all likelihood, it has decreased the volatility. This is a good thing!

Figure 2 is a monthly chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP). A monthly close below the pivot at 102.75 would be reason enough to abandon the notion of higher TIPS. TIP looks like it has the potential to get to $110.

Figure 2. TIP/ monthly

To find other articles that I have written on TIPS, use the search function in the right hand column of this blog. Type the word "TIPS" into the box.

Treasury Yields: Observations

The only asset moving up over the last week has been longer term Treasury yields. This is odd especially in the face of equity market weakness and especially since demand for Treasury bonds has outstripped supply over the past year. So why are yields moving up now? Maybe yields are rising in anticipation of buyer fatigue as this week's record bond issuance comes to market.

This is difficult to know until it happens, but I can say for sure that yields are not rising because of inflation concerns nor are they rising because of strength in the economy. Yields generally rise after an economic expansion is well under way and they generally rise when the unemployment rate falls. The last time I checked, the unemployment rate was still rising; the economy had stopped its free fall, but visibility was less clear; and deflation seem to be a bigger threat than inflation.

Over the past several months, lower Treasury yields did not confirm the strength in the stock market, and this has been a glaring divergence that I have noted on more than one occasion. Now with weakness in the equity markets imminent (but not guaranteed), yields start to move higher. Hmm. I hope this isn't the new normal?

Technically, long term Treasury yields have the characteristics of an asset that could undergo a secular change in trend. This has been a theme that I have been on for over 10 months now, but in all honesty, yields have yet to show real sustainable strength. The best that I can say about my analysis is that I have said to avoid Treasury bonds for anything but a trade.

See figure 1, a weekly chart of the yield on the 10 year Treasury bond. The 10 year Treasury did trade to a yield of 4% back in June, but they fell back to 3.1% level before bouncing. Yields are above the prior weekly pivot high point at 3.437% and the down sloping black trend line, and it would be bullish for higher yields if there was a monthly close over the prior low pivot (on a monthly chart) at 3.432%. Yields appear likely to trade to the resistance zone between 3.856 to 4%.

Figure 1. $TNX.X/ weekly

Why yields should move higher has been a subject of much conjecture all year long. Nonetheless, increasing bond supply has been met by buyer demand, and the fundamental back drop (despite the stock market rally) really has not been conducive for higher yields. The technicals are at odds with the fundamentals.

Other observations are noteworthy. Figure 2 is a daily chart of the ProShares UltraShort Lehman 7-10 Year Treasury (symbol: PST), which seeks results that are twice the inverse of the daily performance of the Barclays Capital 7-10 Year U.S. Treasury index. The triple bottom is is quite noteworthy.

Figure 2. PST/ daily

Figure 3 is a daily chart of the ProShares UltraShort Lehman 20+ Year Treasury (symbol: TBT), which corresponds to twice the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury index. The double bottom is quite noteworthy, as indicated by the volume spike.

Figure 3. TBT/ daily

Another observation comes from the Treasury Inflation Protected Securities or TIPS market. As recently as last week, I was under the belief that yields were heading lower. Why? TIPS were headed higher. There is a very clear inverse relationship between TIPS and 10 year Treasury yields. This can be seen in figure 4. As TIPS go up; long term yields go down.

Figure 4. TIPS v. $TNX.X/ weekly

However, TIPS have not followed through (and I could be wrong!), but they haven't broken down completely yet. A monthly close below the pivot at 102.75 would be reason enough to abandon the notion of higher TIPS. See figure 5. A monthly close below this level would add credence to the notion of higher Treasury yields.

Figure 5. TIPS/ monthly

So let's summarize. There are lots of conflicting crosscurrents when it comes to yields on longer term Treasury bonds. Whether the current mini-lift in yields develops into a longer term sustainable trend is not certain as the fundamentals are at odds with the technicals. Nonetheless, betting on higher yields - because of the technical, secular tailwinds - may be the easier trade to make at this juncture.

If TIPS Are Going Higher, Then...

If Treasury Inflation Protected Securities (TIPS) are going higher, then yields on the 10 year Treasury bond are going lower.

See figure1 a weekly chart comparing the yield on the 10 year Treasury bond (symbol: $TNX.X) in the top panel to the i-Shares Lehman TIPS Bond Fund (symbol: TIP) in the lower panel. There is a clear inverse relationship between these two assets. Troughs in $TNX.X coincide with peaks in TIP. Peaks in $TNX.X coincide with troughs in TIP.

Figure 1. $TNX.X v. TIP/ weekly

I believe TIP is going higher, and I have presented my rationale in these three articles:

Shhh! TIP's Breakout!!

If You Don't Like 'em, Then Don't Trade 'em

TIP v. SPY

So if TIP is going higher, then yields on the 10 year Treasury must be headed lower.

And if yields on the 10 year Treasury are going lower, then equities have a good chance of unraveling. Treasury yields continue to diverge from the equity markets or to put it another way, the Treasury market is not discounting the economic recovery like the equity markets. See "Long Term Treasury Yields: Someone Is Going To Be Wrong". If the economy is recovering, then yields should be headed higher, but they are not. Equity bulls - those bull market geniuses - should be on high alert.

Shhh! TIP's Breakout!!

I last mentioned Treasury Inflation Protected Securities or TIPs in an article written on September 10 entitled, "If You Don't Like 'em, Then Don't Trade 'em". In that article, I discussed the fact that there were other places to look for that "fat pitch" besides U.S. equities. If you didn't like the risk in equities, then play in another sandbox.

"So where is that "fat pitch"? The Dollar Index remains in a down trend, and those assets denominated in the currency have been and should continue to move higher. Precious metals, commodities, and foreign developed and foreign emerging markets should be relative out performers. I have been on this theme for 3 months now. This is old news in my book.

Another place to consider are TIPs or Treasury Inflation Protected Securities. Yes, a lower Dollar and higher commodity prices will flame the inflation debate, but I don't think TIPs are an inflation play but rather a safe haven play."

Since September 10, the S&P500 is up 4.78%, and the i-Shares Lehman TIPS Bond Fund (symbol: TIP) is up 2%. But on a risk adjusted basis, TIP is about one half as volatile as the S&P500. So this 2% move in TIP is more like 4%. So on a risk adjusted basis, the percentage moves in these assets are almost identical. If I were allocating capital between these two assets (which I am), it is likely that I would allocate twice as much capital to TIP as to the S&P500 thus equalizing my risk across assets.

This analysis has nothing to do with the tactical part of the equation either. By this I mean, that equities appear more risky to me at this juncture then TIP's. I am still not clear why TIP's are headed higher. It could be inflation or as a safe haven play. (I have tended to think it is the latter and discussed this in the article from August 28 "TIP vs. SPY). But, it really doesn't matter what I think. TIP has the technical qualities of an asset headed higher.

Figure 1 is a monthly chart of the i-Share Lehman TIPS Bond Fund (symbol: TIP), which I showed in the previous article. Technically, a break out over a trend line formed by two prior pivot high points (red dots) is bullish, and this occurred back in July. This is noted by the up blue arrows in the figure. Last month in another sign of bullish strength, TIP closed above the immediate pivot high point at 102.75. This is now support and a monthly close below this level is reason enough to liquidate this trade.

Figure 1. TIP/ monthly

Figure 2 is a daily chart of the TIP with volume in the middle graph and the on balance volume indicator (with 40 day moving average) in the lower panel. This is accumulation. There is increasing and above average volume (green volume bars) on up days, and for the most part, these days out dwarf the big volume (red bars) down days. Furthermore, the on balance volume indicator is making new highs along with price.

Figure 2. TIP/ daily

As a reminder, let's contrast this with figure 3, a daily chart of the S&P Depository Receipts (symbol: SPY). I believe this represents distribution. Very few up days (green volume bars) are met with above average volume, and the majority of down days (red bars) over the past month have been on above average volume. Furthermore, the on balance volume indicator is diverging from price.

Figure 3. SPY/ daily

Two final points.

One, I want to mention that I didn't come to TIP because I am on some volume or on balance volume kick of late. I came to this asset because of looking for the next "fat pitch" - those assets that have the technical characteristics of showing a major change in trend. The fact that TIP is breaking out and under accumulation is just a by-product of the fact that it has those secular tailwinds.

Two, if I was an all equity all the time kind of person, I would be wondering about the significance of this breakout in TIP. I don't think it should be viewed as a positive sign for equities.

WealthTrack: Interview With Yale's David Swenson

I was recently introduced to "WealthTrack", a business program on public television hosted by Consuelo Mack. I watched several of the episodes and was totally impressed with Ms. Mack and the caliber of her guests. More importantly, Ms. Mack asks the right questions and lets her guests talk. Ms. Mack is more concerned with her guests approach to the markets and how they think about the markets as opposed to what they are buying today. It's not hype, which is refreshing, and I got at least one nugget of information out of each of the shows I watched today. This is good journalism.

Below is a video clip of Yale's David Swenson, which was broadcast in May, 2009. It is about 25 minutes in length. An important point for me was his distinction between liquid and ill-liquid assets, and despite diversification, it was the ill-liquid assets that caused problems for Yale's endowment in fiscal year 2008. Swenson also had positive comments regarding Treasury Inflation Protect Securities, which I have written about several times over the past month.

If You Don't Like 'em, Then Don't Trade 'em

Last night I read somewhere that the problem with the equity markets was that no one really liked them (except for Cramer), yet that was the precise reason why the markets continued to go up day after day - nobody really liked them. Kind of odd, I guess. However, as someone who likes to bet against the consensus, I can understand that sentiment. As we know, the markets will do their best to frustrate the most.

One of our readers brought up a similar point. The sentiment measures are bullish (i.e., bear signal), yet no one really believes in this rally. Most investors are really bearish. At least, this was his "gut" feel.

Hey, as President Clinton once said, "I feel your pain". It is particularly hard to sit out of a run that goes up day after day. But the reality is this: the market is not attractive at this point. Volume has been diminishing; the market is overbought and oversubscribed. Valuations are high. Economic visibility is uncertain.

Now the markets don't go up because no one loves them; they go higher because the buyers are willing to take shares off of the sellers for higher prices, and these buyers hope to sell higher. It seems obvious, but often times, this notion is lost in the angst of "I am missing out".

But let's get real here. If you don't want to play, then don't. Find another sandbox. And that is o.k. too. As far as the equity markets are concerned, this is not the "fat pitch" that I like.

So where is that "fat pitch"? The Dollar Index remains in a down trend, and those assets denominated in the currency have been and should continue to move higher. Precious metals, commodities, and foreign developed and foreign emerging markets should be relative out performers. I have been on this theme for 3 months now. This is old news in my book.

Another place to consider are TIPs or Treasury Inflation Protected Securities. Yes, a lower Dollar and higher commodity prices will flame the inflation debate, but I don't think TIPs are an inflation play but rather a safe haven play. So let's review some charts and why I believe TIPs may be worth a look.

Figure 1 is a monthly chart of the i-Share Lehman TIPS Bond Fund (symbol: TIP). In the lower panel is the indicator based upon Larry Williams' "Pro Go" indicator. The idea behind the indicator is to identify those times when retail traders are dominating the market action. With the indicator nearing extremes, the retail trader has ridden TIPS lower for the better part of the last year. The indicator is at an extreme and where we would expect a reversal in trend as the "smart money" or strong hands take shares off the weak hands. The last multi -month move higher in TIPs (from August, 2007 to March, 2008) was marked by this indicator moving to extremes as well (gray oval on chart).

Figure 1. TIP/ monthly

Technically, a break out over a trend line formed by two prior pivot high points (red dots) is bullish. These break outs are noted with the blue up arrows in figure 1. In essence, the down trend in TIPs has been broken. The rising simple 10 month moving average is also bullish.

Figure 2 is a weekly chart of TIP. The break out or upside violation of the trend line is noted. A weekly close below the 40 week moving average would be a concern; and a weekly close below support at 98.64 would be reason enough to get out of TIP altogether and move to the sidelines. A price target for TIP would be approximately 110.

Figure 2. TIP/ weekly

Figure 3 is weekly chart comparing TIP to SPY (data hidden). The indicator in the lower panel measures relative strength (with a 26 week look back) between the two assets. What we see and what one would expect after a 50% move in equities is that TIP is at point where a reversal should occur. In fact, the indicator is at its lowest level in 5 years.

Figure 3. TIP v. SPY/ weekly

At some point, the equity markets will correct. The indicators and intermarket relationships will make sense. Until then, we always have the option of choosing where we play and how we want to function in the markets. As far as the equity markets are concerned, I see nothing wrong with sitting this one out.

TIP v. SPY

You are not alone if you feel a sense of increasing risk as the equity markets continue to elevate after a 50% plus run in 6 months. One can only imagine what kind of moon shot would have occurred if the fundamentals were really good as opposed to less bad. Nonetheless, buyers of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) are also sensing the risk of a rising equity market built on so much hope.

Figure 1 is a weekly chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) in the top panel v. the S&P Depository Receipts (symbol: SPY) in the bottom panel. First, the movements of these two instruments are poorly correlated across multiple time frames. Second, TIP's tend to top when investors are bearish on equities as determined by the "Dumb Money" indicator, and TIP's tend to bottom when investors are bullish on equities. In essence, when investors seek safety from equities, they move into TIP's. And this appears to be happening even though the equity markets continue to defy gravity.

Figure 1. TIP v. SPY/ weekly

Looking at figure 1, we note the current "breakout" in TIP over a down trend line (inside the gray oval). TIP's bottomed (inside the gray rectangle) in 2006 and 2007 while the SPY was in the process of topping out. TIP's then moved significantly higher in October, 2007 once the top was in for equities (noted with vertical red line). Tips generally moved higher from 2004 to 2005 (black up arrow) while equities were range bound.

In sum, the TIP's ETF has "broken out" as it appears to be attracting the interest of investors. Why this is so in the face of a rising equity market should be of interest (and maybe a note of caution) to equity investors and those who see nothing but bullish pastures ahead. In the past, TIP's has generally performed well when equities have underperformed. I view the rise in the equity markets as a time of increasing risk, and it appears that TIP's investors feel the same way too.