Month: March 2018

Yes, I’m writing another post about bonds. I think it’s an important topic because just about everyone is expecting bond yields to go to the moon as they call for the end of the 30+ year bond bull market. When there’s this much ‘group think’ to a single topic I begin looking for reasons why it’s wrong. I did it with Tech, when people were making jokes that semiconductors were trading like they cured cancer and how amazing the tech sector was. While long-term I agree tech has some great prospects, I believe I may have been one of the few people who turned cautious on tech based on its stretched relationship with the broad market in my post Has The Technology Sector Run Too Far Too Fast?, just before we saw markets fall and re-test the February levels, lead on the downside by the S&P 500 largest weighted sector, Technology.

Okay, back to one of the most hated markets right now… bonds. 10-year Yield broke 2.8% yesterday, let’s dive into why it could keep going lower.

First, we have sentiment, as I mentioned, is at record low bullishness for bonds. Here’s a chart from SentimenTrader showing his Optimism Index. Currently nearly the lowest levels seen in the last 5 years. We last saw extremely low sentiment in 2017 before the 10-year Treasury rallied.

Next lets take a look at how bond traders are positioned. Below is the Commitment of Traders chart for 10-year Bonds, the bottom panel shows the red line, Commercial Traders, are holding a very large net-long position, while large traders and small traders are who are taking the other side by being net-short. If we were to look at 30-year Treasury’s, we’d see that it was just the small trader group (individual traders mostly) that are net-short, while Commercials and Large Traders are net-long/flat right now.

Finally, the main chart I wanted to share and that’s the correlation of the 10-year Treasury Bond Yield ($TNX) with the S&P 500. This is looking specifically at the 1-year correlation between the two, which has been steadily rising for several weeks and now sits at 0.76. As the chart shows, going back to the late-90s, bond yields have struggled to stay elevated after their correlation to the equity market has gotten this high. While a break above 0.75 has not marked the exact high of yields, it’s created a very tough environment for bond traders to continue to sell and push yields higher.

We also have a technical resistance level to contend with for $TNX, with 3% was the high in 2013 before traders turned bullish on bonds sending yield back near 1.5% over the next three years. If we are in fact seeing the end to the bond bull market then this resistance level should get taken out as yield continues to march higher and bond prices going lower.

With the major U.S. equity indices testing prior important support levels of the February low and the 200-day Moving Average (for the S&P 500), bond levels become that much more important as managers evaluate their risk tolerances. I also thin it’s important to not disregard the weakness being seen in the copper-gold ratio, which I tweeted an updated chart of on Tuesday.  I’m hesitant to be as confident as many other traders appear to be in thinking the 10-year yield will continue moving higher without any kind of consolidation or back-and-fill. With equities taking a bunch, I think bonds may get emboldened and we see buyers step back into fixed income. We’ll see what the market throws at us going forward…

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

While preparing the newsletter for subscribers of Thrasher Analytics, a new service I launched to provide risk management tools and analysis, I thought I’d share one of the charts that’ll be sent out in this weekend’s note.

Below is a chart from late-2014 through 2017 with the 10-year Treasury Yield in the top panel and a positively correlated market in the bottom panel. While there are many ways to slice up the fixed income market, like any chart I review, I prefer to look when price action is not being confirmed. These divergences (for example: higher lows vs. lower highs) tell us that two markets or securities are in disagreement of the direction of the trend. When two typically positively correlated markets disagree, we can gain valuable information in a possible trend change.

That’s what we have here with the 10-year Treasury Yield ($TNX). For example, a large divergence was formed in mid-2016 as the Treasury yield was making a new low under 1.4%, while our leading market was seeing strength, making a large higher low. That ended up marking the bottom in yield as it eventually rose up near 2.6% when another divergence began to play out. In March ’17 a slightly higher high was put in for $TNX as our leading market was weakening and making a lower high. Yield eventually followed suit and declined to near 2%. As you can see on the chart, several divergences of varying degrees have been formed over the last few years, giving ample notice to a trend change in fixed income.

Fortunately we don’t have to stop there. We can can take this a step further in using tools to find potential trend changes in our leading market as well, providing more notice to potential changes in Treasury’s. In my Thrasher Analytics note I go into more detail of this chart and whether we’re seeing confirmation of the latest move in yield or if a divergence has been formed. I thought this would act as a good example of a what I cover, in addition to my main focus of the Volatility Risk Trigger, for subscribers.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

One of the pieces of data I keep a close eye on when evaluating the S&P sectors is the distance they’ve moved relative to various moving averages. I believe in the long-term market trends will often persist, but there’s a degree of ‘snap-back’ that also can exist when securities and markets begin to run too far too fast.

The Technology Sector ($XLK) has had a great year so far in 2018, up over 8% while the S&P 500 has risen less than 3%. What makes that performance disparity interesting is that tech is currently the largest sector weighting in the S&P 500. So when tech is doing well it should be (in a sense) passing some of those gains over to the broad index, bolstering up its performance as well. However, the relative performance between the two has separated to historically rare levels.

Below is a chart of the ratio between the tech sector (via XLK) and the S&P 500 (via SPY) going back to 2003. The red dots indicate when the ratio has gotten more than 4% above its long-term moving average. As you can see, getting this far above the moving average is not very common. We saw a string of days greater than 4% coming off the March ’09 low as well as a clustering in 2011 and most recently before the February ’18 correction. However, notice that when the ratio gets this stretched it often snaps-back, meaning when the blue line is declining the technology sector is under-performing the broad market.

I also like to look at a composite of moving averages, which is what this next chart shows the median distance from several moving averages of various lengths. The red dots show when the XLK vs. SPY ratio has resembled the current level we’re at today. The sample size shrinks considerably compared to the chart above when we were just looking at the single MA. A few days before the February declined matched our current level, as did one day in 2017 before a decline in relative performance. We then would need to go back to 2009 to find a prior time where XLK was outperforming the S&P 500 at its current rate and then before that was in November 2007 and 2003, both marking major highs in relative performance for technology.

So has the technology sector run too far too fast? In a relative sense I would say yes it has. There are still several industries within the tech space that I believe have very strong charts and could continue to strength.

It’s important to note that when we discuss relative performance it doesn’t necessarily mean an absolute decline in price. We could continue to see tech appreciate along with the index and still underperform. Going forward I’ll be looking for confirmation of an impending slow down in tech, specifically looking at the supply and demand of the sector as well as its ratio to the S&P 500. Based on historical examples, we may see the technology sector slow down its current impressive ascent or potentially decline in absolute terms.

This is an example of the type of research provided to subscribers of Thrasher Analytics, click here to learn more.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.