FINDING THE RIGHT LONG-TERM TRENDLINE FOR THE 10-YEAR TREASURY YIELD -- NEXT UPSIDE TARGET FOR THE 10-YEAR YIELD IS 3% -- 10-YEAR BOND PRICE IS BOUNCING FROM SHORT-TERM OVERSOLD CONDITION -- RELATIVE STRENGTH TREND STILL FAVORS TRANSPORTS OVER UTILITIES
WHICH TRENDLINE IS BILL GROSS REFERRING TO... I've heard a lot this week about Bill Gross' prediction that a move by the 10-Year Treasury yield above 2.6% would end the secular bull market in bonds. Part of his reasoning is that a rise above 2.6% would break a falling resistance line going back to the 1980s. Since I'm always skeptical when the media starts using technical analysis, I decided to go back and try to find that trendline. Normally when looking at long-term charts, logarithmic scales are used. So Chart 1 shows the falling trendline starting in 1981 on a log scale. Clearly that's not the line since it's way above the 2.6% level. Chart 2 plots the same chart on an arithmetic scale. That's not the line either since it's already been broken (as has a trendline drawn from the 1984 peak). The only fit I could find was a trendline starting with the peak from 1987. That's the one shown in Chart 3. And it appears to work. I assume that's the 30-year trendline Mr. Gross is referring to. I don't disagree with that interpretation, since I agree that the secular bull market in bonds has probably ended. Just thought you might like see the trendline for yourself.
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Chart 1
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Chart 2
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Chart 3
NEXT MAJOR TEST FOR 10-YEAR YIELD WILL BE 3% ... The weekly bars in Chart 4 plotted since 2000 put the trend of the 10-Year Treasury yield (TNX) in better perspective. And it does look like a bottom is being formed. The green box shows the TNX bouncing off 1.5% in 2016 which was a successful test of its 2012 low. Since that "double bottom" the TNX has broken a falling trendline extending back to 2007. To confirm that it's major trend has turned up, the TNX needs to clear its late 2013 peak near 3%. That level coincides with a falling trendline extending back to 2000. The current position of it monthly MACD lines (below chart) suggest higher yields are likely. Each previous upturn in the MACD lines took place at yield bottoms in 2003, 2009, and 2012. The MACD lines turned up for a fourth time in 2016. However, they did so from a much higher level. That's a strong indication that bond yields have most likely hit bottom, and that the secular bull market in bonds that started in the 1980s has probably ended. That's obviously bad for Treasury bond prices.
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Chart 4
10-YEAR TREASURY PRICE IS IN SUPPORT AND OVERSOLD ... There's good and bad news in the next chart. It shows the trend of the 10-Year Treasury Note Price ($UST) forming a potential "double top" over the past five years. [Treasury prices trend in the opposite direction of yields]. The mid-2016 peak in the bond price fell short of its 2012 peak. During the second half of 2016, end especially since the November 8 election, the Treasury prices tumbled to the lowest level in three years. Needless to say, a drop below its late 2013 would be a bearish sign for Treasury prices. The good news is that the UST has reached a potential support level near 122. Its 14-day RSI line (top of chart) also shows it to be in a deeply oversold condition. That's been enough to support a modest rebound in bond prices over the past couple of weeks (and a pullback in bond yields). Unfortunately, Chart 5 has a bearish look for the future of Treasury note prices.
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Chart 5
TRANSPORTS PULL BACK WHILE UTILITIES BOUNCE... The market's recent stalling is partially explained by the next two charts. Chart 6 shows the Dow Transports pulling back over the last month after surging to a record high during the fourth quarter. The rally in the transports (led by airlines and rails) represented a move into economically-sensitive stocks in anticipation of economic growth. The transports, however, appear to be rebounding near their 50-day average (blue arrow). In addition, their 14-day RSI line (top of chart) has moved from overbought territory over 70 to potential support near 50. At the same time, the lower box shows the Dow Utilities rebounding over the last month after falling sharply during the second half. That was due to the back up in bond yields and weaker bond prices. The UTIL has reached a potential resistance line drawn over its July/September highs. It's rebound is partially due to a short-term rebound in oversold Treasury bond prices (and a pullback in bond yields) which aren't likely to continue. It's also up against its 200-day average (not shown). Of the two charts, the transports have much stronger trend than the utilities. Chart 7 confirms that by plotting a ratio of the transports divided by the utilities. That ratio broke out to the upside during November and has been in a short-term pullback. That rising ratio still appears to favor transports over utilities. Which is another way of saying that stocks are still favored over bonds.
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Chart 6
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Chart 7
DOW STILL HAVING TROUBLE HITTING 20K... We can't end without taking another look at the Dow Industrial attempt to reach the 20K level. Traders still seem to be selling up against that big round number. The hourly bars over the last month show the Dow consolidating between resistance just below 20K and support near 19700. Odds still favor the upside. It would take drop below its late December intra-day low at 19718 to signal that the attempt has failed -- at least for now.
