Bonds Archives | Opportunity Identified

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.

February 25, 2015 | Posted by David Zarling, Head of Investment Research

Yields Retreat As Bonds Bounce Off Logical Resistance

Technical analysis allows us to identify logical points of increased supply or demand for any liquid security. We can find places where a change in the direction of price is likely. As previously mentioned, this applies to any liquid security we can chart, including bonds. Over the past week, the financial media has been quick to point out the “spike in bond yields.” While true, bond yields have moved quickly upward since the beginning of February, the bigger trend (yields decreasing) remains intact. And as of the past few days, we find that bonds and yields are reacting to logical points of resistance. Let’s take a look at the 10 Year Treasury Note Yield ($TNX) and the 20+ Year Bond Fund ETF from Barclays (TLT) so you can see what we see. But before we get too far, it should be remembered that the relationship of bond yield to bond price is simply this: when the bond price goes up, its yield goes down and vice versa. Technically said, a bond’s price and its yield are inversely related. Ok, on to the charts.

First, the weekly chart of the 10 Year Treasury Note. Notice that for 20 years now, the yield on the 10 Year has been steadily declining within a well defined trend as marked by the green channel. Annotated in orange is the incredible “spike in yields” being reported. As you can see, this is minor in relation to the overall trend. We do concede that someday, yields will breakout of this channel and begin a new upward trend, bringing many financial ramifications with it. We’ll make sure to let you know when that happens. But for the time being, the overall trend in yields is down.

Taking a closer look at the 10 Year Yield below, we find that its yield has reversed course upon reaching 4 different levels of significant resistance:

The mid-channel line dating back 20 years
Demand/supply dating back to 2009
38.2% Fibonacci retracement from 2013 highs
Former support turned resistance dating back to 2012

This is a logical move and one that indicates a high probability of resuming the downward pressure on yields.

The resumption in downward yield pressure and upward bond price movement can also be seen by taking a look at the 20+ Year Bond ETF, TLT. Looking at the chart below, it’s easy to see that prices dropped from January highs and have so far found demand around the 126 level, which used to be a prior supply/resistance level. In addition, this bond ETF continues to move within an upward slopping series of tram lines. Until the 126 level and lower boundary tram line is broken, the trend in bond prices remains up. With bonds finding support here and major stock markets breaking out across the globe, it’s our opinion that we’re likely headed into an environment of rising bonds and stocks. In the end, however, that is our opinion. We don’t trade on our opinion. We trade on price, the only opinion that matters.

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November 17, 2014 | Posted by David Zarling, Head of Investment Research

Risk On or Risk Off? [Weight of Evidence, Part 4 of 7]

The credit (aka bond) markets overshadow the equity markets in terms of dollar value. Yes, the equity markets get all the publicity and headlines. However, it is the waters of the credit market that run deep. By looking at the current state of the credit markets, we can learn about the relative health of a large portion of the financial industry. When the bond markets speak, we listen.

At 360 Investment Research, we examine investor demand for various grades of credit (Junk Bonds, High Yield Bonds, and Treasuries). Specifically, we compare these grades against each other as a ratio. See the first chart below. This is a ratio of High Yield Bonds versus Treasuries, represented here by ETFs HYG (High Yield) and TLT (Treasuries) in blue. This ratio tells us the credit market’s appetite for risk. When in a speculative mood, funds will flow out of Treasuries (less risk for lower yield) and into High Yield Bonds (more risk for higher yield). When more risk is being taken, the ratio rises. The opposite also applies. When the bond market is seeking safety, it flies to Treasuries and the ratio decreases. This is what we find right now – the ratio has been declining – the credit market has been seeking safety since January. All the while, stocks (the more speculative market) have been rising. The credit market is seeking safety while the stock market seeks more risk. This is unusual behavior. Normally, they are in agreement. When big money managers are increasing positions of risk within the stock market, the same takes place in the bond market with funds flowing into High Yield credit. So the fact that we have this divergence is a problem. Who’s right? I don’t know, but it will resolve itself one way or another. Either stocks are going to correct downward or the credit market is going to flow into High Yield.

Even though we don’t know what will happen this time around, when we look at the past, the credit market seems to be right more often than not. That leads us to our second chart, which shows proprietary moving averages of the same type of ratio comparing High Yield Bonds v. Treasuries (JNK:TLT). This is placed in the same chart as the S&P 500. Not only do we notice that when the moving averages cross (green below orange), it’s a good time to sell stocks. We also notice that these ratio moving averages can give early warning signs through divergence. More often than not, the credit market flees to Treasuries before equities sell off. In 2011, the bond market diverged from stocks for more than six months before there was some type of resolution (stocks sold off). We find ourselves in the same spot now. The bond and stock markets have diverged from each other for the past 11 months. Who’s right? We don’t know, but we’re going to find out sooner or later. Either stocks sell off or the bond market seeks High Yield. Get your popcorn ready.

Don’t forget to share the wealth with your friends using the social media icons below. Check back soon for part 5 of our 7 part series.

July 3, 2014 | Posted by David Zarling, Head of Investment Research

Bonds (TLT) must hold the line

One of my favorite trades of the year has been bonds. Up 10% YTD, our bond proxy, TLT (an ETF), is now at an important inflection point. Recently, it made a lower low and a lower high. Today, it bounced off an upward trendline that runs parallel to the dominant trendline for the past 6 months. It must stay above this trendline and continue daily closes above the line in the sand (dashed line at 110.67), in order to remain long. If it complies, and can clear the last two recent highs, I would consider adding to this position (let’s worry about that later). If it does not hold here, we’ll take our 10% and find something else that likes to increase our portfolio.

Have a safe 4th of July. Remember our independence!