TLT HITS MOMENT-OF-TRUTH, 30-YR T-YIELD TESTS, YIELD CURVE REMAINS POSITIVE, CRUDE SUFFERS BIGGEST DECLINE, COMMODITIES BOOSTS BONDS, UTILITIES LEAD IN JULY, REITS BOUNCE WITH BONDS
TLT HITS MOMENT-OF-TRUTH WITH BIG WEEK ... Link for today's video. The first week of the month is always packed with economic reports and employment data, which makes it a big week for bonds. Bonds caught a bid over the last three weeks as the 20+ YR T-Bond ETF (TLT) surged off its mid July low and broke above its early July high. Does this surge mark a significant trend reversal or is it just part of a counter trend bounce?
Chart 1 starts with some perspective by showing weekly bars for TLT over the last two years. The bond ETF fell from January to June and retraced 50-62% of the 2014 advance. This retracement amount is typical for a correction within an uptrend. The surge over the last three weeks looks impressive, but I am not ready to call for a major trend change just yet. The red lines mark a Raff Regression Channel from the January high to the June low to define this downtrend. The upper line ends around 125 and the 40-week moving average is around 123.50. Taken with the May high, I am marking a trend-resistance zone in the 123-125 area. TLT is at its moment-of-truth because it is trading near this zone right now.
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Chart 1
The indicator window shows 10-week StochRSI, which can be used to time shorter swings within the trend. A surge above .80 is bullish until countered with a plunge below .20, which is bearish. A surge above .80 represents a bullish upward thrust in momentum and a plunge below .20 represent a bearish downward thrust. The indicator surged above .80 three weeks ago for a bullish upthrust that I would respect as long as the signal remains valid. A StochRSI move below .20 would negate this signal and be bearish.
30-YR T-YIELD TESTS BREAKOUT ZONE... Chart 2 shows daily bars for TLT over the last eight months. I also drew a Raff Regression Channel from the January high to the June low and added the 200-day SMA. Because the daily chart has more detail than the weekly, the Raff Regression Channel and trend lines may appear slightly different. The late May high, 200-day moving average and Raff channel combine to mark resistance in the 122-124 area on the daily chart. The indicator window shows the 30-YR Treasury Yield ($TYX) breaking out in May as it exceeded its 200-day moving average and March high. The July decline carried $TYX back to this breakout zone for a test of the uptrend. A break below 27.5 (2.75%) would signal lower yields and higher bond prices.
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Chart 2
YIELD CURVE REMAINS POSITIVE... Chart 3 shows four different Treasury yields in the main window and the yield curve in the indicator window. These yield symbols were added using "Price (same scale)" as an "Overlay" on SharpCharts. As expected the 2-year Treasury Yield ($UST2Y) is the lowest and the yields rise as the maturity increases. This is a positively sloped yield curve and this is, well, positive for the economy. The trouble starts when short-term yields are equal to or higher than long-term yields.
There are three items worth noting on this chart. First, Treasury yields started rising in January as the 30-YR Yield moved from 2.25% to 3.25%. The long-term yield fell back over the last few weeks as bonds surged. At this point, I think it is a pullback within the overall uptrend in yields. Second, notice that the 2-year Yield backed off the .75% level three times in the last eight months. A breakout here would call for higher short-term yields. And finally, notice that the yield curve steepened from January to June as the difference between the 10-YR Yield and 2-YR Yield widened.
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Chart 3
CRUDE SUFFERS BIGGEST DECLINE SINCE 2008... As with most tradable instruments, the bond market is driven by several factors and sometimes it is impossible to pick the one "key" factor. Strength in the economy is generally viewed as negative for bonds because it puts more pressure on the Fed to raise rates. Strength in the labor market is also viewed as negative for bonds. Inflationary pressures are generally viewed as negative for bonds, while deflationary pressures and disinflation are viewed as positive. With this in mind, I think the July advance in bonds was driven by the free fall in oil. Chart 4 shows Spot Crude ($WTIC) with a sharpest monthly decline since 2008. There is perhaps some support in the mid 40s from the January-March lows, but the trend is clearly down and I would not count on support holding.
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Chart 4
WEAKNESS IN COMMODITIES BOOSTS BONDS... PerfChart 5 shows July performance for three stock ETFs, two bond ETFs, three commodity ETFs and two currency ETFs. This is basically my intermarket PerfChart using ETFs. Notice that the USO Oil Fund (USO) was down over 20%, the Copper ETN (JJC) was down over 11% and the Gold SPDR (GLD) was down over 6%. In contrast, the 20+ YR T-Bond ETF (TLT) was the second best performer with a 4+ percent gain in July. The sharp decline in commodity prices is disinflationary and this is positive for bonds. In his Market Message on July 25th, John Murphy noted that the CRB Index hit a six year low and this decline could indicate that deflationary pressures are emerging, which in turn could prevent central banks from raising interest rates. This is why bonds may be rising. Chart 6 shows the same PerfChart using the index symbols.
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Chart 5
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Chart 6
UTILITIES LEAD IN JULY... The three week surge in bonds is boosting interest rate sensitive ETFs like the Utilities SPDR (XLU) and the REIT iShares (IYR). In fact, XLU was the top performing sector in July. PerChart 7 shows the performance for the nine sector SPDRs in July. XLU, the Consumer Staples SPDR (XLP) and the Consumer Discretionary SPDR (XLY) were the top performing sectors in July. It is a rather strange trio because the consumer discretionary is there, but it is what it is.
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Chart 7
Chart 8 shows XLU with higher highs and a rising channel in July. Even though the July advance was strong and the five week trend is up, XLU is nearing a big resistance zone (just like TLT). The March-April-May highs mark resistance in the 44.5-45 area. At this stage, I would be wary of XLU because the bigger trend is down and resistance is nigh. XLU needs to fully reverse the bigger downtrend with a breakout at 45 before I would consider turning bullish. The indicator window shows the Correlation Coefficient (TLT,XLU) spending most of its time in positive territory. This means XLU and TLT tend to move in the same direction. Chartists, therefore, should watch TLT (bonds) for clues on XLU (utilities).
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Chart 8
REITS BOUNCE ALONG WITH BONDS... Chart 9 shows the Vanguard REIT ETF (VNQ) hitting a 52-week low below 75 in late June and bouncing with a move above 79. As with XLU, I think the overall trend here is down and this is a counter-trend rally. The ETF broke above its mid June high and this is positive, but bigger resistance is just ahead in the 80-81 area. The green lines mark a Raff Regression Channel to define the five week advance. Support is set a 77, a break of which would reverse the upswing and signal a continuation of the bigger downtrend. The indicator window shows the Correlation Coefficient (TLT,VNQ) in positive territory and this means VNQ tends to move in the same direction as TLT.
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Chart 9
VIDEO DETAILS... Link for today's video.
