HOUSING RELATED ETFS LEAD STOCKS -- LONG BOND ETF HITS SUPPORT ZONE -- MEDIUM BOND ETF HITS KEY RETRACEMENT -- MUNIS AND INVESTMENT GRADE CORPORATES FOLLOW TREASURIES -- JUNK BONDS TRADING MORE LIKE STOCKS
HOUSING RELATED ETFS LEAD STOCKS HIGHER... Link for todays video. A rebound in January housing starts put a bid into housing related ETFs on Wednesday. Chart 1 shows the Homebuilders SPDR (XHB) within a clear uptrend since late August. The ETF broke above resistance in early January and then consolidated to set support around 17.5. In contrast to SPY and the other major index ETFs, XHB remains below its April high around 19.5 and needs to break this high for a 52-week high. Chart 2 shows the Home Construction iShares (ITB) with a falling flag the last few weeks. There was a breakout attempt last week, but the ETF fell back over the last five days. In fact, this 5-6 day decline looks like a smaller falling flag. This is a classic example of the fractal nature of chart patterns. The same patterns can be seen on weekly, daily and intraday charts. In fact, one would often be hard pressed to define the timeframe on a chart without a price or time scale. Turning back to ITB, the ETF is clearly making another breakout attempt. Support for the small flag resides around 13.50 and support for the bigger flag is around 13.25.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
LONG BOND ETF HITS SUPPORT FROM BROKEN RESISTANCE... Even though the Treasury bond ETFs remain in clear downtrends, both are firming near potential support levels that could give way to a bounce. Chart 3 shows the 20+ year Bond ETF (TLT) falling over 15% from late August until early February. Im sure a few Elliott Wavers can even uncover a five wave sequence in the October-February decline. TLT is also nearing a potential support zone that stems from broken resistance. A break above the upper trendline of the falling channel is the first step to a trend reversal. Key resistance is set at 93 for now.
(click to view a live version of this chart)
Chart 3
Curiously, the late August peak in TLT coincided with the stock market bottom. I would also dare say that the downtrend in bonds is as strong as the uptrend in stocks. Picking a bottom in bonds looks as dangerous as picking a top in stocks. The indicator window shows the S&P 500 ETF in red and the 20+ year Bond ETF in black. These two have been negatively correlated the last 12 months. Looking back, notice how TLT bottomed a few weeks ahead of the stock market peak in April (blue arrows). Perhaps a bottom in bonds will again foreshadow a peak in stocks.
MEDIUM BOND HITS KEY RETRACEMENT... The 7-10 year Bond ETF (IEF) is also a Treasury bond fund, but the bonds are shorter in duration. While the longer maturity 20+ year Bond ETF peaked in late August and declined over 15%, chart 4 shows the 7-10 year Bond ETF peaking over a month later and declining around 10%. Longer bonds are more sensitive to changes in interest rates because they pay interest over a longer period of time. While TLT is trading near support from broken resistance, IEF is trading near the 62% retracement mark. Fibonacci aficionados will recognize this number as the reciprocal of the golden mean (1.618). 62% is also part of the Fibonacci Retracements Tool, which is used to mark potential turning points. In this case, IEF retraced around 62% of the prior advance. This is by no means a hard support level or a definitive reversal point. Instead, a move to this retracement tells us to be alert for price action that might signal a reversal. So far, the overall trend is clearly down and the bounce over the last few days is not enough to get excited about. I am marking first resistance just below 93. This level stems from broken support and the November trendline.
(click to view a live version of this chart)
Chart 4
MUNIS AND INVESTMENT GRADE CORPORATES FOLLOW TREASURIES... While investment grade corporate bonds and municipal bonds were hit along with treasuries, junk bonds acted more like the stock market and continued higher. What giveth? Chart 5 shows the Investment Grade Corporate Bond ETF (LQD) peaking in early October and declining into mid December. The ETF bottomed ahead of Treasuries by forming a higher low in early February. Also notice that LQD reversed course in the Fibonacci cluster zone around 105-105.65. Picking the right reaction low for the Fibonacci Retracements Tool is challenging when there is more than one choice. There is clearly a consolidation from mid March to mid June and then a triangle breakout. I elected to ignore the spike low and draw the Fibonacci Retracements Tool from the lows in early April and early June. With two sets of retracements, chartists can then look for zones where the retracements cluster.
(click to view a live version of this chart)
Chart 5
Chart 6 shows the PIMCO Muni-bond Strategy ETF (MUNI) taking a huge hit in November-December. MUNI did a double dip in December-January to find support near broken resistance and just below the 62% retracement mark. Overshoots are common when emotions run high, as they did with this muni-bond panic. The ETF ultimately held support around 49.75 and bounced back above 50 this week. The downtrend has yet to fully reverse because MUNI remains below a major resistance zone from the January highs.
(click to view a live version of this chart)
Chart 6
JUNK BOND ETF TRADES MORE LIKE THE STOCK MARKET... In contrast to the bond ETFs shown above, the Lehman High-Yield Bond SPDR (JNK) and the iShares High-Yield Bond ETF (HYG) acted more like the S&P 500 with a move to new highs in January-February. Both ETFs corrected along with the stock market in November, but did not suffer the fate of Treasuries in December-January. Junk Bonds held up well because they are more tied to the economic outlook. Treasuries are under pressure because the economy shows strength, stocks have been moving higher for almost two years and inflationary pressures could be building. Junk Bonds are moving higher because the ability of these companies to pay on their obligations improves along with the economy. More profits means more money to pay off debt. Chart 7 shows the iShares High-Yield Bond ETF hitting a new 52-week high this month. Like the stock market, this ETF is overbought and ripe for a pullback. However, there are simply no signs of weakness. Broken resistance turns into first support around 90. There are also two trendlines extending up from the June-July lows. I opted not to start these trendlines from the spike lows in May. Technical analysis is a bit subjective. Chart 8 shows the Lehman High-Yield Bond SPDR (JNK) for reference.
(click to view a live version of this chart)
Chart 7
