A Funny Thing May Be Happening On The Way To The Secular Bull Market In Interest Rates

• How to spot a secular reversal
• Not all maturities are created equal
• The near-term technical picture

How to spot a secular reversal

A secular, or very long-term, trend is one that exists over many business cycles or what are usually called primary bull and bear markets. They vary in length from as little as 8 years for the equity bull market of the 1920’s, to as much as 41 years between 1940 and 1981 for the post World War II bull market in bond yields. The average duration of such trends, for bonds, stocks and commodities is somewhere in the 18-20-year time span. Bond yields peaked in September of 1981 and zig zagged down until the summer of last year for a secular bear market duration of 35-years, a move that is well above the norm.

The big question following the recent yield rally, is whether that secular trend has terminated and a new secular bull underway? There are two key points to note. First, secular trends are like oil tankers, they take a long-time to turn around. That means that if yields did bottom last year, which I believe will turn out to be the case, there hasn’t been enough time to complete a back and forth battle between buyers and sellers that typically develops at such juncture points. In other words, it may have happened but we do not yet have the evidence to prove it. Look at Chart 1 for instance, the post war secular bull market in yields was preceded by a 12-year battle between buyers and sellers. The reversal to the downside was associated with a 6- or 18-year battle, depending on which chart point you pick.

Chart 1

Chart 2 takes a closer look at the 1980 peak, where you cans see, that  by the middle of 1985, the yield had completed a top, experienced a reversal in the upward peak/trough progression violated a serious up trendline and crossed below its 96-month MA. That’s the kind of evidence that makes a slam dunk case!

Chart 2

Chart 3 updates us to the present with the 20-year yield. So far there has been no base formed, no trendline or MA penetration, and the declining peak trough progression remains intact. All we have seen so far, is a sharp rally off the lows!

Chart 3

Not all maturities are created equal

The second point, is that it depends on the yield you are following. We have already seen that there is scant evidence that the 20-year maturity has reversed. Chart 4, though, reflects the 7-year yield, which tells us a different story. This maturity bottomed in 2012. When the 20-year series fell to new low ground last year, the 7-year maturity was successfully testing its 2012 bottom. Following that test, the yield rallied but has not yet registered a new post 2012 high. No secular reversal signal here, apart from the positive 96-month MA crossover.

Chart 4

By shortening the maturity by a further two years we come to the 5-year yield in Chart 5. This one again experienced its low point in 2012. In this instance though, the rally off last year’s higher low did manage to push the yield above its 2014 high, thereby reversing the series of post war declining peaks and troughs and completing a 5-year double bottom. It’s also rallied above the 96-month MA but has yet to break above the secular down trendline. The evidence in this case does suggest that a secular bull market is underway for the 5-year maturity.

Chart 5

The near-term technical picture

Since it achieved that breakout, the 5-year has been trading in a narrow band, the lower end of which, on the daily bar chart, is just above the previous breakout point (Chart 6). Gaps on a chart represent emotional points. In everyday life extreme emotions are often revisited as people typically have second thoughts. The same is true for gaps, in that they are usually filled, or at least an attempt is made to fill them as investors have second thoughts concerning the emotional news that created the gap in the first place. The problem, is that we never know when the closing process is going to take place. Some gaps are never filled, but they are by far the exception. In the case of the 5-year yield there is a gap in the 1.50-1.60% area below the market. That suggests that the recent trading range may break to the downside. That would require a drop below 1.75%. I am not saying that that is going to happen, but if it does, given the positive long-term technicals, I would expect the yield to find significant support at the lower end of the gap.

Chart 6

In recent years, the 52-week ROC for the 20-year yield has offered some pretty timely signals of important trend changes. That has happened when it has reversed from an extreme in either direction. For this purpose the  + and -20% levels represent the overstretched levels. Chart 7 shows that there have been 16 instances when this has happened in the last three decades. Note that I am including the 1999/2000 and 2014 double signals as one. Right now the indicator has exceeded the +20% level, but we cannot say that it has yet reversed. Were it to do so that would suggest that further base building for the 20-year yield will take place and any secular “buy” signals delayed.

Chart 7

Chart 8 features the widely followed Barclays 20-year Trust, the TLT. The price of this ETF has been in a trading range for some time. The flat KST is offering no indication of the direction of the ultimate breakout, except to say that the current situation is clearly a finely balanced one. One hint that the resolution of this range will be to the upside (lower yields) is the appearance of a gap between $127 and 129. The upper area of that gap is also in the same vicinity as the 200-day MA, which means that $129 represents formidable resistance. The principal point here, is that if prices do break to the upside, such action would almost certainly trigger a reversal in the 52-week ROC inh 7. Based on previous instances that would likely trigger a significant delay in our secular buy signal for the 20-year maturity.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.