Bonds Archives | Opportunity Identified

June 27, 2017 | Posted by David Zarling, Head of Investment Research

Here’s The Skinny On Long Bonds

Back in mid-April, we posted about Why You Should Be Long The Long Bond. Back then, we noted the extreme pessimism regarding US Treasuries (aka Long Bonds) due to skewed short positions and anecdotal evidence that too many were confident yields would go higher. This long bond pessimism, and more importantly, the price action of Long Duration Treasuries (ticker: TLT), had us more than just liking long bonds. In fact, we became rather obnoxious about them on Twitter:

A little over 2 months and +7% later, and we’re back writing about long bonds. Why? Not because we love bonds so much. Rather, if you’ve been long the long bond since our Tweets and subsequent post, we think it might be time to take some of those gains off the table. In our April post, we wrote:

The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Yesterday, TLT quickly reacted to the high of 128.57. Close enough fro us. There is a reason for using price targets. These measured moves define our potential reward when determining whether a trade opportunity exists. What’s our risk? What’s our reward? The answer to these questions will determine whether or not it makes sense to enter a new position. After all, everyone should have an exit plan prior to entering a trade. That’s sound risk management and our number one priority as market participants. Yesterday, the ETF for Long Duration Treasuries (ticker: TLT), hit our upside target. Not only that, but we have this important new development: Last week alone, TLT received more inflows than all domestic equity mutual funds, and all domestic equity ETFs combined year-to-date [1]. Think about that for a moment. In only one week, TLT exceeded the total incoming purchases of all domestic equity mutual funds and ETFs made in the past 6 months! Talk about a sentiment shift. Everybody and their grandma is now piled into Long Duration Treasuries. Sounds like a crowded trade to us. Large crowds make for small exits. Can Treasuries move higher from here? Absolutely. However, without price sustaining 129 (and above) on TLT, we would be very skeptical of any further upside in this move. Keep in mind, this move from March until now is countertrend in nature. Price is above a falling 200-day simple moving average. A falling 200-day simple moving average is a hallmark of downtrends. As a friendly reminder, bonds and yields have an inverse relationship.

And if long bonds are reversing here, it means higher yields are on their way. And if higher yields are on their way, it will include ramifications for some other important sectors [cough *Financials* cough], which we’ll cover in another post. For the time being, TLT needs to regain 129, or at a minimum, stay above 124 to ruin our “higher yields from here” thesis.

In conclusion, with TLT reaching our price objective in a countertrend trade and inflows reaching extreme levels, we think it makes sense to take some off the table here. What applies to us may not apply to you. Trade safe.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

By the way, we created this free tool for you, The Ultimate ETF Cheat Sheet. It’s an easy-to-use ETF resource guide. We think you’ll like it.

[1] Source

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

April 17, 2017 | Posted by David Zarling, Head of Investment Research

Here’s Why You Should Be Long The Long Bond. (Are You Shorting Them Right Here, Right Now?)

Disbelief is not an investment plan. I have yet to come across a successful investor or trader whose main investment philosophy is solely, “this won’t end well.” We can have all the strong opinions we want, but I’ll let you in on a little secret. Markets don’t care what we think. Markets are going to do what markets are going to do. We cannot bend them to our will. The faster we check our opinions (and pride) at the door and humble ourselves to the all-knowing market forces of supply and demand, the sooner we can begin to profit from objective facts and avoid losses generated by subjective opinions. Over the past few months, a very popular subjective opinion has reached a crescendo: higher rates/yields are all but certain going forward. As usual, this narrative became popular after the objective facts were already in motion. Beginning in July 2016, long bond yields (aka 20+ year U.S. Treasury yields) were rocketing upward as long duration bonds were selling off hard. Only after this move did the media begin touting lower bond prices and higher yields. Prices drive narratives, not the other way around. For example, with a solid bond sell-off already in motion, the financial media informed the investing public that higher yields were all but certain for the foreseeable future. Take a look at their helpful timing below. You can’t make this stuff up.

See how that works? Price first. “News” second. As soon as you realize how this sequential relationship works, the more you’ll be able to filter the “news” you consume. Is there a better way? Absolutely. Study objective facts instead. In other words, study price. It knows more than we do. In this case, the price of bonds knows more than we do. Conversely, yields know more than we do. As a refresher, yields work inversely to bonds. When bond prices rise, their corresponding yields drop.

What does supply and demand for 20+ year Treasuries look like right now? Here’s the weekly chart of TLT, an ETF that does a good job performing similarly to 20+ year Treasuries.

As you can see, after reaching all-time highs in July 2016, bonds began selling off in earnest. Because of the inverse relationship between bonds and their yields, this move caused yields to rise sharply. Only after this took place did financial news pundits begin pounding the table regarding higher yields and the consensus become rates would continue to move higher in 2017.

But after the rapid selloff in bonds, we’ve seen them stabilize sideways for several months. Meanwhile, consensus public opinion is loud: “higher rates during 2017 are a certainty!” This strong opinion has been matched with strong positioning. An especially high amount of investors are shorting long duration bonds. This means they are placing wagers that bond prices will continue to fall. With record short bond positions, this important credit instrument is sitting on upside jet fuel. What do we mean? Basically, if bonds rose enough in price it could trigger a short squeeze, a scenario in which shorts are forced to cover their losing position by buying bonds. This causes a feedback loop in which bond prices rise quickly while short-sellers continually scramble to cover their positions. Here’s the daily chart of TLT:

Three days ago, it broke above an area of supply, which acted as resistance four times before. This breakout is significant and is taking place when most are not expecting it. If this recent breakout requires short sellers to cover their positions, it’s going to throw jet fuel onto the demand fire. Above 122 on TLT, it makes sense to own long duration treasuries. Below that level, we’d be on the wrong side of the trade. The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Right now, chances are, if you asked your financial advisor, banker, friend, grandma, or typical TV pundit, they would all say they’re expecting higher rates going forward. Anecdotally, I have it on good authority during this year’s Market Technician Association’s Symposium in New York, they asked for a show of hands when asked: “do you think rates will be higher at the end of this year?” I was not there but the entire room raised their hand. This room is filled with incredibly smart people. And all of them raised their hand. All. Of. Them. Don’t take what I’m implying here as a slam on the consensus demonstrated or the intellect of those in the room. Rather, I’ll go out of my way to highlight the intellectual horsepower of any one of the individuals in attendance is multiple factors above of my two-cycle excuse for gray matter. These are extremely smart people and their collective opinion is higher yields are on their way. Are they right or are they wrong? I have no idea. It’s not about being right or wrong anyway. It’s about being on the right side of the trade. Price has the final say. Accordingly, we should be watching long duration treasuries with a simple game plan: own TLT above 122 (and watch the corresponding yield drop). Below that, it’s hands off while the rise in yields continues to fuel consensus.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

February 27, 2017 | Posted by David Zarling, Head of Investment Research

3 Important Developments Ready To Impact Your Portfolio

While stocks across the globe are rising, three very important assets have been consolidating. The demand for U.S. (and many international) equities has been incredibly strong for the past 3.5 months. After all, more demand than supply means higher prices. It’s economic law, not opinion, that drives price movement. The media and President Trump can politicize market movements all they want, but the truth is the urgency of buyers surpasses that of sellers. Call it a “Trump Rally” and you’ve got a nice sounding, gimmicky headline that grabs mouse clicks and eyeballs. It’s fake news. Don’t fall for it. Focus on the visual math of price instead. Have you ever met a price chart that lied to you? Exactly. Me neither. Price doesn’t lie. We can rely on it to make investment decisions and manage risk. And right now, the charts (aka visual math) is identifying three significant consolidations taking place in three important assets. When these compressions resolve, it will have an intermarket impact for at least the next few months.

First, let’s start with Oil, the world’s most consumed, and possibly most important, commodity. The price of black gold reverberates throughout economies and markets (keep in mind that a market is not the same as the economy it’s involved with). Nonetheless, the price of oil is important for many people, industries, sectors, and economies across the globe. It makes sense to pay attention to it. Since February 2016, oil has rallied over 100%. It should be noted, however, that this rally took place after a -75% drop dating back to June 2014. Oil would need to rally another 100% from current levels just to get back to June 2014 prices. This factual perspective is a stark reminder that massive drawdowns and losses are an investor’s worst enemy.

Looking at a daily chart of Oil, it’s easy to see price consolidating and compressing above the very important $50 level. Buyers and sellers are battling for the next move. In fact, you can’t go very far online without finding someone referencing the record long positions by institutions and record short positions by commercial traders.

More often than not, commercial traders seem correctly positioned. However, we don’t need to predict. We need to plan. A break upward out of this consolidation would start a race to $75. On the other hand, we want nothing to do with this underneath $50. The line in the price is clear. Above $50, it makes sense to own it. Below that, it can be someone else’s problem.

Another important development is the consolidation of the U.S. Dollar. Just like Oil, the US Dollar broke out above previous resistance in the 4th quarter of 2016. On the daily chart of the U.S. Dollar, we’re compressing between $99 and $101. A break above the upper green trendline would signify a resumption of the uptrend started in 2014. And if price moves below $100, there is no reason to own the greenback. If the Dollar moves down through this important level, we could have a false move on our hands, with selling pressure picking up and providing a major tailwind to the aforementioned important asset, Oil. At the same time, keep in mind that Oil and the Dollar can continue to appreciate together as they’ve been doing since early 2016. Each chart must stand on its’s own merit.

Finally, this trifecta of fun is concluded with a look at the 10-year Treasury Yield. The increase in yields from July, 2016, through the end of the same year was impressive to say the least. However, we need to remember the bigger context. We still remain in a 35-year downtrend in rates. That being said, resolution out of the consolidation annotated in the chart below will determine the next few months of direction for this important bond barometer. Note that the movements in rates have rhymed with the movements in the dollar. It’s likely that both resolve in the same direction. As mentioned before, each chart must stand on it’s own. With record short positions against 10-Year Treasury Bonds, we think the move out of this compression will be violent.

In conclusion, each of the three aforementioned assets are on the verge of picking a direction, up or down, that will have a major impact for the next few months ahead. Keep an eye on these consolidations for evidence to help you get on the right side of the trade. After all, if we’re in the markets to make money, it’s not about being right or wrong. It’s about being on the right side of the trade.

As always, you can get free real-time updates and commentary about this opportunity and many more here: @360Research

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

September 11, 2016 | Posted by David Zarling, Head of Investment Research

Summer Vacation Is Over: The Return Of Volatility

Stocks sold off hard this past Friday, with the S&P 500 down -2.5% in one day on the largest trading volume in over two months. Summer vacation is over. The major market players are back at their trading desks. Time to get back to work. As market participants ourselves, this recent volatility should not surprise us. We knew our environment before Friday’s selloff. A week before, we shared the following market characteristic with our followers on Twitter (@360Research):

The following day, we released an article addressing this subject, highlighting important downside support levels on the S&P 500. In that article, we wrote:

If you are aware of your market environment, you know the week leading up to Labor Day is a notorious snoozefest in U.S. Equity Markets. With many large institutional money managers taking the week off, volume is extremely light and percentage moves slim. And if you study market seasonality, like we do, then we also know the next two months have an increased probability of volatility and downside risk.

And since we’re busy patting ourselves on the back, we also shared the following fun fact with our Twitter followers on September 6th:

Three days later, global equity markets and indices saw impressive one-day losses on heavy volume. Bonds were major losers in the global selloff with 10+ year Treasuries and Corporates being hit hard. Correspondingly, yields jumped. In addition, the VIX (a CBOE index which shows the market’s expectation of 30-day volatility) shot up 39%. That, my friends, is increased volatility. The tightest price range in 20 years has been followed by an increase in volatility. Not surprising.

Also not surprising are the nauseating, click-bait headlines. You know what we’re talking about: “Stocks Routed Due To Janet Yellen’s Bad Hair Day.” You never see headlines like, “Stocks Drop Due To More Sellers Than Buyers.” You won’t see that because it doesn’t make financial media money to report the simple truth. They require sensationalism in order to make money. Talk about a conflict of interest!

Thankfully, we don’t focus on headlines. We focus on buyers and sellers, supply and demand. We focus on price.

So where to from here? As always, let’s watch price to determine important levels of supply and demand. Here are the same charts provided last week, but updated with prices through last Friday.

It’s clear the S&P 500 ($SPX) is immediately challenging an upward trendline dating back to February 11, 2016. Also apparent is price testing an important resistance level, which was previously an area of supply between 2100 and 2150. Based on the rule of polarity, this is likely an area where buyers could step into the market.

Below is the daily chart updated from last week’s release.

Again, we see the S&P 500 has entered an area that should provide some resistance/buyers. If the area between 2100 and 2150 does not see buyers step in, a visit to 2000 is likely.

In conclusion, the recent explosion in volatility should not come as a surprise due to the strong seasonal tendencies of September and October. And we don’t need to click on fancy headlines to manage risk. Rather, we have price in front of us to help guide our decision making. Let’s use it.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

August 26, 2016 | Posted by David Zarling, Head of Investment Research

Pay Attention To This Interest Rate Instead

While everyone is listening to the noise of the Federal Reserve, we’re focusing on reality. Janet Yellen can wax intellectual about theories. We’ll continue to focus on the hard data, such as the 10-Year US Treasury Yield, an interest rate market participants should really care about.

Since establishing an all-time-low in early July, the 10-Year Treasury Yield has found continuous support. So much so, that this important metric created a consolidation triangle near the lows established back in early 2015 and again in early 2016. You can see this important consolidation in the chart below.

With the 10-Year Yield breaking out, this could have some potentially positive consequences for equities. When we discuss bond yields, the supply and demand battle is fought on the bond price side of the product. As the 10-Year Treasury Bond price increases, its yield decreases. The opposite is also true. So the 10-Year Yield breakout highlighted above is a direct reflection of 10-Year Treasuries being sold. For many institutional investors, the 10-Year Treasury Bond is used as a safe haven. When the big money leaves a safe haven, what do you think it’s buying? You got it: Equities.

Nothing is guaranteed, but if the 10-Year Yield can sustain this breakout, it should provide a tailwind to Equities as an asset class.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.