ONE WAY TO HEDGE FALLING BOND PRICES IS WITH PROSHARES SHORT TREASURY ETFS -- MARKET VECTORS STEEL ETF LAGS OTHER COMMMODITY GROUPS -- US STEEL AND NUCOR ARE JUST BREAKING OUT -- EMA LINES REMAIN POSITIVE FOR SPX
BOND ETFS CONTINUE TO DROP ... With the stock market continuing its climb, money is flowing out of the fixed income market. As I explained in last Thursday's message, Treasuries are among the worst performers (especially the long bond). Charts 1 and 2 show the recent deterioration in two of the more popular Treasury ETFs. Chart 1 shows the 20+year T Bond iShares (TLT) slipping below its 200-day moving average (the yield on the long bond has risen above its 200-day line). The long bond has been hit the hardest since QE2 was announced because it's most reflective of increased inflation expectations. Chart 2 shows that the 7-10 Year T-bond iShares (IEF) have fallen to the lowest level in four months and headed toward the 200-day moving average. In case you're not aware of it, ProShares offers three Short Treasury ETFs that rise when bond prices fall. They offer one way to hedge your bond holdings against further losses.
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Chart 1
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Chart 2
SHORT BOND ETFS ... ProShares offers three short Treasury ETFs that rise when bond prices fall. All three offer a way to hedge long Treasury bond positions, or to simply profit from falling Treasury prices. Chart 3 shows the ProShares Short 20-Year Treasury bond ETF (TBF). The TBF is designed to rise by the same percentage amount that the TLT (shown in Chart 1) falls. Since September 1 when bond prices started falling, the TLT has lost 12% while the TBF has risen a similar amount. Chart 4 shows the UltraShort 20-Year Treasury ETF (TBT). The TBT is designed to rise twice as much in percentage terms as the TLT loses. And it's done that. The TBT has gained 24% since September 1 while the TLT (top line) has lost 12%. Both of those short ETFs are meant to trend in the opposite direction of the 20+Year T-bond ETF (TLT). Chart 5 shows the PS UltraShort 7-10 Year Treasury (PST), which is meant to rise twice as fast as the 7-10 Year Bond iShares (IEF) fall. Since the start of November, the PST has risen 7% while the IEF has fallen half as much (-3.5%). If rates continue rising, chances are most of the losses will be seen in the long bond. That being the case, most of the protection (or gains) would be found in the TBF (Chart 3) and Chart 4 (TBT) that trend in the opposite direction of the long Treasury bond. Since bond prices are falling on inflation expectations, it makes sense that a lot of bond money is flowing into commodity-related stocks that include precious metals, coal, agriculture, and steel.
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Chart 3
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Chart 4
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Chart 5
MARKET VECTORS COMMODITY ETF PERFORMANCE... Market Vectors offers a number of stock ETFs that are closely tied to commodity markets, and I've written about several of them over the past couple of months. On October 5, for example, i wrote about the Coal ETF (KOL) being the strongest part of the energy patch (it still is). On October 12, I showed the Market Vectors Agribusiness ETF (MOO) hitting a two-year high. In both cases, I showed stocks that were leading the move upward. Last Tuesday, I showed the Market Vectors Gold Miners ETF (and its junior companion) moving to new highs as well. Chart 6 shows the relative performance of those three commodity-related ETFs since the start of the year. In order of strength, the GDX is in first place (+35%), KOL is second (+25%), MOO is third (+18%). All three ETFs have cleared their April peaks to record new yearly highs. I'm going to focus today on the fourth ETF which is the Market Vectors Steel ETF (SLX). Chart 6 show the SLX being the weakest of the four (+14%). It has yet to clear its April high. There are two ways to look at that. One is that steel stocks are simply market laggards. A second, however, is that the SLX may offer relative value in a fast moving commodity group.
Chart 6
FOREIGN STEEL LEADERS... Chart 7 shows the Market Vectors Steel ETF (SLX) trading at a new eight-month high today and nearing a test of its spring high. Its relative strength line (below chart) has just reached a new eight-month high as well. Most of the upside leadership has come from foreign stocks. The biggest SLX holding (and strongest performer) is Rio Tinto (UK) which is hitting a new 52-week high. The second biggest SLX holding is VALE (Brazil). Chart 9 shows that foreign steel leader hitting a new 52-week high as well. Admittedly, neither one looks cheap at this point. There are, however, a couple of US steel stocks that may offer better value.
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Chart 7
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Chart 8
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Chart 9
US STEEL GROUP AND NUCOR BREAK OUT ... Two US steel stocks just breaking out are shown below. Chart 10 shows US Steel Group (X) having just cleared its August high and trading at a new seven month high. Its relative strength line (below chart) has just broken an eight-month down trendline. Chart 11 shows Nucor (NUE) clearing its November high and its 200-day moving average. NUE is the day's top gainer in the material group. Either or both stocks may offer a relatively cheap entry into a strong steel and commodity group.
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Chart 10
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Chart 11
EMA LINES ARE STILL POSITIVE... Long-time readers know that one of my favorite moving average combinations involve 13-34 period EMAs. Chart 12 applies them to the S&P 500 which is the benchmark I use for short-term buy and sell signals. A buy signal is given when the shorter 13-day EMA crosses over the longer 34-day EMA. That last happened during the first week of September. The subsequent uptrend remains intact as long as the shorter EMA remains above the longer. During the November pullback, the two lines converged but didn't cross which kept the uptrend intact. They're now diverging again which is a positive sign. Weekly and monthly EMA remain positive as well.
