Perhaps The Fed Won't Raise Rates After All?

• Long-term background for bonds
• Bond Prices at a critical short-term juncture point
• Is the 5-year yield forming a massive top?
• Utilities moving in sympathy with bonds
• Interest sensitive REITS starting to improve
• Follow the commodities

Long-term background for bonds

A lot of people are betting that stronger economic data will enable the Fed to raise rates in the summer. However, recent market action may be arguing against such an outcome. To begin, we need to consider the long-term picture. That’s where Chart 1 comes in, as it compares the 20-year yield ($UST20Y) to its 52-week ROC. The momentum indicator moves up and down like a yo-yo. Every time it rallies to the +25% level and reverses it seems to signal a major trend change in the rate, as shown by the green arrows. The same thing happens with its interaction with the -25% level, as flagged by the green lines. In the last couple of months or so, the ROC has once again challenged and failed to hold above the +25% level, thereby triggering another signal. Calling a basic trend reversal though, also requires some confirmation from the yield itself. In this case we could use the 52-week MA as our benchmark. It is currently at 2.42%. At this point we have a momentum sell signal but no confirmation.

Chart 1

Bond Prices at a critical short-term juncture point

Chart 2 says we could be on the verge of a trend reversal. It features the price of the Barclays 20-year Trust, the TLT. It is right at its 200-day MA and slightly above the small green resistance trendline. Two indicators suggest that it will succeed. First the KST is in a rising mode. Second, there is an unfilled gap starting at $126. Gaps are almost invariably closed, but the problem is that we do not know when. The rising KST suggests that it could happen soon. If an attempt is made, obviously the price will need to cross above  its 200-day MA to do it, and that would definitely add to the bullish case for prices.

Chart 2

Chart 3 shows the same data, but this time in line format. This format makes it clearer that the price is running up against the neckline of a potential inverse head and shoulders pattern A close above $125 would complete the pattern, thereby indicating substantially higher prices.

Chart 3

Chart 4 shows that the 7-10-year ETF, the IEF, has already crossed above its 200-day line. Recent action represented a retracement to this MA, but now the price is edging up to a new recovery high. A rising KST is supporting this strength.

Chart 4

Is the 5-year yield forming a massive top?

Finally, if we move to the 5-year yield ($FVX) in Chart 5, we can see a different pattern. In this instance, it looks as though the yield may be about to break down from a huge potential top. The difference between an actual and potential top are, of course, two different things, so we should not jump the gun. A realistic benchmark for completion would be a close below 1.65%, as that would result in a decisive break of the red trend line as well as the 200-day MA. This number will obviously rise along with the level of the average itself. Note also that the five-year yield created a large gap during the November drop thereby setting up the potential for another gap closing.

Chart 5

Utilities moving in sympathy with bonds

If bond prices are to rise and yields fall, it would be reasonable to expect the highly interest sensitive Utilities to be moving in sympathy with such a trend. Chart 6 offers some backup support in this respect. Here we see the Vanguard Utility ETF, the VPU. It has recently broken out to a new high and its long-term KST, in the second panel, has begun to edge up again.  Relative action, following a January breakout, retraced some ground and now looks set to move higher.

Chart 6

Chart 7 shows last week’s breakout on the VPU in greater detail, together with the fact that the short-term KST has also gone bullish.

Chart 7

I think Chart 8 is more impressive since the iShares Global Utilities ETF (JXI) has just broken above a key resistance trend line and its KST has clearly started to re-accelerate to the upside. Relative action is also poised to show an improvement.

Chart 8

Some interest sensitive REITS starting to improve

If rates are going to drop, I would have expected to see an improvement in the interest sensitive REITS. So far, that has not happened in a broadly based way. However, Chart 9 shows that the iShares Mortgage Real Estate Capped ETF (REM) recently broke out  above a 4-year resistance level. More impressive is the fact that the RS line has completed a base.

Chart 9

Follow the commodities

Changes in commodity prices are one of the big driving forces behind movements in bond yields, so following an index such as the DB Commodity ETF (DBC) makes sense.  Chart 10 shows that it has recently been in a trading range, not unlike the 5-year yield. Whichever way it breaks is therefore likely to confirm or deny any signals emanating from the bond market. The two levels worth monitoring are $16.50 on the upside or $14 on the downside.

Chart 10

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.