The Question Investors Should Be Pondering

It looks like we are back to that risk on - risk off market.  Risk assets, like equities and commodities, are down while bonds are trading slightly higher today.  While this is really nothing new, the question investors should be asking themselves if today's action is a prelude to a more significant turning point.  In other words, will bonds catch a bid while riskier assets take a breather. 

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Long Term Treasury Yields Going Lower

I have spent a lot of time over the past month discerning the direction of Treasury yields.  So with only a few hours ahead of the Fed meeting that will decide the fate of the free world, why not put my head on the chopping block and make the call?  The technical and fundamental data supports a move higher in long term US Treasury bonds.

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Treasury Yields and Quantitative Easing

Good friend TL provides us with his analysis of the effect QE has had on Treasury yields.  Click on the link below.

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Inflationary Headwinds Increasing

Our indicator constructed from the trends in the CRB Index, gold, and yields on the 10 year Treasury is not extreme but it did rise last week suggesting that inflationary headwinds are increasing for equities.   Another push higher in gold or possibly in Treasury yields would send this indicator into extreme territory.

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TLT: Less Constructive

It was only 10 days ago that I was constructive on i - Shares Lehman 20 plus Year Treasury Fund (symbol: TLT).  However, the technical picture has deteriorated, and the intermarket bond model is starting to weaken.  A full fledged breakdown has yet to occur, but the recent breakout is looking more like a fake out.  And this should be concerning.

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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. 

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Buying The Dip: Good Idea, Fraught With Consequences

Our indicator constructed from the trends in the CRB Index, gold, and yields on the 10 year Treasury has come off of the extreme readings seen several weeks ago, and within the context of a trend following strategy that I have detailed here, here, and here, this represents a buy signal for the SP500.  In essence, with prices on the SP500 above its 40 week moving average and our indicator not in the extreme zone, prices should move higher.  In other words, this is a good time to be "buying the dip"; however, this strategy is not without risks.

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Long Term Treasury Bonds: Very Positive Backdrop

When I last looked at long term Treasury Bonds (click here and here), I stated the following:  

"While the bottom for TLT (or top for TBT and yields) appears to be in, it is not clear whether this will lead to a sustainable move that would cause price to break the down sloping trend line seen in figure 2.  My hesitation in making the call is my (yet to be presented) intermarket bond model.  This model is still bearish on bonds, but it is not unusual for it to lag the technicals at this point.  If the model turns bullish on bonds while the technical set up is developing, then I will have greater confidence in the sustainability of this price move."  

At the end of last week, the inter market bond model has turned bullish on bonds.  The fundamental and technical picture are now supporting a higher move in bond prices.

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Inflationary Headwinds Diminishing

The composite indicator constructed from the trends in the CRB Index, gold and yields on the 10 year Treasury is no longer extreme.  As prices on the SP500 are above the 40 week moving average, this would be a buy signal as per our strategy that combines this filter with the 40 week moving average.

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Still A Headwind

Strong and rising trends in CRB Index, gold, and yields on the 10 year Treasury persist, and collectively, this represents a headwind for equities.

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TheTechnicalTake: TLT

It is my belief that we have seen the high in long term Treasury yields at least for a while, and I expressed this opinion in yesterday's article on Treasury yields.  Today, I thought it would be instructive to look at the bullish technical patterns developing in the i - Shares Lehman 20 plus Year Treasury Fund (symbol: TLT).

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Long Term Treasury Yields: Heading Lower

Lost in all the noise about crude oil this week and its effect on the economic recovery (i.e., the equity rally) has been the top in Treasury yields.  This article will cover the technical aspects of the Ultra Short Lehman 20 plus Year Treasury Fund (symbol: TBT).

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This Isn't Trivial

One of the strategies that I have frequently written about for the SP500 involves the 40 week moving average and the composite indicator constructed from the trends in crude oil, gold, and yields on the 10 year Treasury.  When these trends are strong and rising, the SP500 faces stiff headwinds.  This is data going back to 1984 and includes the 1990's as well.  In essence, using this indicator as a filter for a SP500 simple moving average strategy can increase returns by about 25% while reducing maximum draw down by 50% over buy and hold.  In other words, just stay out of the market or hedge yourself when the collective trends of gold, crude oil, and yields on the 10 year Treasury are strong and rising.

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TheTechnicalTake: TBT

I would describe the current price action in the equity market as meaningless.  It doesn't impart any information to me as the dip is always bought albeit on persistently shorter and shorter time frames.  On the other hand, long term Treasury yields are on the rise and breaking out from their current trading range.  Rising yields will be a headwind for equities, and are likely a sign of inflation worries.

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Inflationary Pressures Are Subsiding

As this headline from the Wall Street Journal shows, inflation pressures are just beginning to be recognized by investors.

 

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We're Off!!!

As we start the new year, it is well worth repeating what I wrote on October 15, 2010: "In essence, higher yields are in the immediate future, and this should have negative ramifications for equities and commodities.  Trends in gold, crude oil, and yields on the 10 year Treasury are rising and this in aggregate will put pressure on equities."  Equities have continued to perform better than I would have thought considering the rising trends in Treasury yields, gold and crude oil.  As we start the year off, it is the same old same old.  If equities rise, then Treasury yields and crude oil will do so as well, and if I had a preference, this is where I would put my money.  Think of it as a tax on higher equity prices that eventually will result in an equity sell off.

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TheTechnicalTake: TBT

I have been highlighting higher Treasury yields since October 15 (well before the heard), and I also mentioned on December 8 that the move higher in Treasury yields would "pick up steam".  But every price move has its limits, and the Ultra Short Lehman 20+ Year Treasury (symbol: TBT) is no different.

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Inflationary Pressures Are Persistent

On November 8, 2010, our composite indicator that looks at the trends in gold, crude oil and yields on the 10 year Treasury registered  an extreme value.  At that time, I wrote: "A strategy that combines this "fundamental" filter with the 40 week moving average has given a sell signal."  With rising Treasury yields and persistence in the trends in gold and crude oil, the composite indicator remains in the extreme zone.  This is not the time to buy equities.  For those keeping a scorecard at home and for those who are buying the bullish nonsense, the SP500 has gained about 1% over the last 5 weeks.

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TheTechnicalTake: TLT

The move higher in long term Treasury yields, that I first started to write about on October 15, 2010, is beginning to pick up steam.  This can be seen in figure 1, a daily chart of the i-Shares Lehman 20 + year Bond Fund (symbol: TLT).  

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Rising Yields Are Both Good and Bad for Equities

Rising long term Treasury yields can be viewed as a sign that the economic recovery is taking hold.  That is one interpretation.  Another is that rising yields will serve to pressure equities and choke off any rally that may develop.  I believe the latter scenario will eventually predominate as there is a limit to how high equity prices can rise in these liquidity fueled rallies.

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