AGG). – Andrew Thrasher

Are Bonds Preparing to Weaken?

Posted on March 5, 2014 by Andrew Thrasher, CMT

The bond market has been the star performer for 2014 with the 20+ Year Treasury Bond ETF ($TLT) up nearly 6%. In January I discussed the bond chart I was watching and highlighted the positive divergence that had taken place in the Relative Strength Index. We saw bonds continue to head higher, outpacing the lackluster equity price action.

Today I want to discuss the same chart, but this time look at the negative divergence that is starting to play out. In July ’12 and April ’13 we saw the ratio between long-duration bonds ($TLT) and short-term duration bonds ($IEI) begin to see a divergence in momentum. The Relative Strength Index was heading lower as the ratio which showed $TLT outpacing $IEI make a higher high. This divergence ended up starting a period of weakness for Treasury bonds, as shown in the price action of $TLT in the third panel of the chart.

This same type of divergence between the ratio of $TLT and $IEI is taking place right now. We saw the RSI indicator break above 70 but unable to hit ‘overbought’ status again as the ratio met the previous high. What I’ll be watching now is whether the previous low in momentum gets taken out. If 50 can’t hold for the RSI as support then I would expect to see weakness enter into bonds, which as the third panel shows – hasn’t been good news for $TLT.

However, if we see the momentum indicator hold support and the ratio takes out the previous two highs at 0.89 then we may be able to see the bulls bond trade continue. I’ll let price lead the way.

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.

The Bond Chart I’m Watching Right Now

Posted on January 24, 2014 by Andrew Thrasher, CMT

Bonds have begun to come back to life in 2014 as traders began to realize that the Federal Reserve pulling back on its bond buying program is not the end of the world and that sentiment towards bonds is at record lows. I began getting interested in the bond chart back in September when the Barclay’s Aggregate Bond Index ($AGG) was holding support and seeing bullish internals. I’ve also been discussing the range the 10-year Treasury yield has been in with resistance at 3% in my weekly Technical Market Outlook.

Today I want to take a different look at the bond market, specifically the ratio between the long-dated Treasury bond ETF ($TLT) and the shorter-term bond ETF ($IEI). Typically during strong price action in the bond market we see investors move further out on the yield curve as they chase duration – i.e. showing a stronger preference for 20-year Treasury bonds ($TLT) than 3- to 7-year Treasury bonds ($IEI).

For the last half of 2013 we saw the ratio between $TLT and $IEI begin to bottom. While at the same time the Relative Strength Index (RSI) started to put in higher lows as it created a positive divergence. What was also interesting during this period was if we look at On Balance Volume of the ratio (bottom panel of the chart), which shows us if volume has been favoring $TLT or $IEI. As you can see, a strong divergence in this buying pressure (On Balance Volume rising) had been going into longer duration bonds than shorter-term Treasury’s.

When momentum (RSI indicator) and volume (On Balance Volume) begin to act in concert with one another, we often see price begin to play ‘catch up’ as it confirms the internals.

Now we have the ratio between these two bond ETFs testing its 200-day moving average which has acted as decent support over the last two years. If we take a look once again at the Relative Strength Index we can see that the past two divergences (lower highs while price makes higher highs) after becoming ‘overbought’ have led to a trend change that favored $IEI over $TLT.

At the moment we just have the RSI indicator over 70 but no divergence as developed just yet. What I watch for is if the RSI is unable to follow price higher and stays under the 70 level as it diverges. A lower high above 70, while a divergence, still shows buyers pushing momentum overbought, which can be read as bullish. It’s possible we could see a repeat of 2012, where the RSI indicator breaks 70 and then breaks it again as buyers continue to favor the long-duration trade.

Sentiment towards bonds continues to sit at historic lows as it seems traders are refusing to acknowledged the (so far) short-term trend change that’s taken place in the bond market. Going forward I’ll continue to monitor the relationship between long-dated and short-dated duration ETFs and see if the bond market can continue higher or if we begin to see a divergence in momentum as the first clue to a shift back to $IEI from $TLT.
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Weekly Technical Market Outlook

Posted on December 9, 2013 by Andrew Thrasher, CMT

I hope you all had a good weekend. I got a lot of great feedback from my Weekly Technical Market Outlook post from last week, so I’m happy you guys are finding this type of post useful. While the bulk of the categories I’ll cover will not change from week-to-week, I believe a level of consistency is important; I will try to add categories that I feel are important to cover as they pop up. With that said lets get into it…

Equity Trend

The trend for the S&P 500 ($SPX) continues to be up. Last week we saw a slight dip but buyers stepped in at the 20-day moving average to close out the week with strong move on Friday. I’ll continue to be watching the 20-day MA for short-term support on any further weakness.

Equity Breadth

Last week we did not see much improvement in breadth, which is to be expected with the weakness we saw in the equity market for the bulk of trading.

The bottom panel of the chart below shows the percentage of stocks above their 200-day moving average. This measure of market breadth has garnered quite a bit of attention over the last few months. While the negative divergence is important to point out, the percentage itself is still north of 60%.

I reference 60% because that’s the level it was unable to get back above at the 2007 high. We saw the percentage of stocks above their 200-day moving average drop for nearly eight months before a top was put in for the S&P 500 ($SPX) in ’07. While we are presently approaching the same duration of deterioration, the percentage itself still shows the bulk of stocks in theoretical up trends (above their long-term MA). A break of 60% would also end the trend of making higher lows for the percentage above 200MA, and that’s when I think it’ll be time to start getting concerned. So while this metric of market breadth is worrisome, it’s not yet to levels I feel trigger a red flag.

Equity Momentum

Nothing major happened in equity momentum last week. We saw the Relative Strength Index hold above 50 during the slight bout of weakness and the MACD and Money Flow indicators both dropped but aren’t sending serious warning signs. We still must contend with the negative divergence between momentum and price, especially if we see another lower high made in the RSI if the S&P makes a run at a new high.

S&P 500 60-Minute

In last Monday’s Technical Market Outlook I discussed the negative divergence I was seeing in two momentum indicators (RSI and MACD) on the 60-min chart and that they could lead to lower prices in the short-term. The level of support I was watching was unable to hold as price fell to the November 20th low. Going into the short drop we had a negative divergence in the RSI indicator (top panel) and as price went lower we began to see a positive divergence in the same indicator. This helped act as kindling and the match that lit the fire to send stocks high being the non-farm payroll report on Friday. If things continue to improve I’ll be watching the 1810 and November high as possible resistance levels.

Last Week’s Sector Performance

Below is a chart of the relative performance of the nine major S&P sectors for last week. The percentages shown represent the sector’s performance in relation to the S&P 500, not their actually return. As expected the defensive sectors lead last week, with utilities showing the strongest gain. It’s interesting to see health care be further back in the pack, away from its lower-beta counterparts.

Year-to-Date Sector Performance

No big changes in sector strength year-to-date. The three strongest sectors are still health care, cyclicals (consumer discretionary), and industrials.

Bonds

The bond market had some interesting price action last week. The strong non-farm payroll data that showed unemployment had dropped to 7% in October sent the 10-year Treasury Yield ($TNX) up 21 basis points and above 2.9% intraday on Friday. However, we also saw a positive move for several bond ETFs. Junk Bonds ($JNK), 20+ Year Treasury’s ($TLT), and the Aggregate Bond Index ($AGG) all saw gains in the face of rising bond yields on Friday.

With that, I wanted to take a look at the chart for the 10-year Treasury Yield. We have an interesting level of resistance just a few basis points away. The blue line on the chart below creates a trend line off the 2010 and 2011 highs in yield. I’ve also marked the 2013 range with green dotted lines. To break out of this range we either need to see the 10-year yield get above (and hold) 3% or get down to 2.4%, which would be under the July and October ’13 lows.

Sentiment

There are two sentiment-related charts I want to show this week. Both come from SentimenTrader, which is an excellent subscription service for sentiment data.

SentimenTrader has a set of indicators that are classified as intermediate-term (1-3 months). The chart below shows the overall composite score of those indicators, which includes for example COT data, AAII Survey, and option activity. This gives a good overall view of equity sentiment. As the chart shows, sentiment is still at elevated levels but only for the second time this year.

Next is a bond sentiment chart, which uses data from the Rydex family of mutual funds. The chart below shows the percentage of assets held in bond bullish funds. As you can see, assets have been flooding out of the bullish bond fund and hitting levels not seen since at least 2010. We’ve seen many predominate economists and analysts turn bearish on bonds, and the data from Rydex indicates the individual investor has the same thinking. You’ll notice that previous low levels over the last year have not led to substantial bounces in bonds, which means we should not expect troves of cash to steer back into the bond market based on this set of data. However, this level of bearishness is important to keep in mind, especially as bond yields get close to testing resistance as I mentioned in the Bond section.

Major Events This Week

This week doesn’t look to be a very data-intensive week. Here’s what is scheduled to be announced that traders may want to keep an eye on:

Monday: None
Tuesday: JOLTS (job openings) report
Wednesday: Treasury budget
Thursday: Jobless claims, Retail sales, and Business inventories
Friday: Produce Price Index

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Weekly Market Technical Outlook

Posted on December 2, 2013 by Andrew Thrasher, CMT

This week I am starting something new with the blog. Each Monday morning I’ll be posting a series of charts that look at the big picture of major markets. Something I’ve personally been working on lately has been stepping back and not getting lost in the flood of information. These are also some of the charts I use in my firm’s weekly investment committee meeting and show a weekly market technical outlook. Hopefully this post each week helps you get a better idea of where the markets stand from a technical perspective and makes you better prepared for the week ahead.

Equity Trend

First up is the overall trend on a daily chart of the equity market via the S&P 500 ($SPX). For 2013 the trend has been positive with a few bouts of volatility along the way. The green dotted line on the chart below connects this year’s lows and helps identify the overall trend. I’ve also included the 20-day and 100-day moving averages. Depending on time horizon, these two MA’s have acted as support during recent down swings.

Equity Breadth

Think of equity breadth as a measure of health for the up or down trend. As the S&P 500 ($SPX) rises we want to see strong participation. With that, there are multiple ways for us to measure participation or the health of the trend. First we’ll look at the cumulative number of advancing issues minus declining issues on the NYSE. When there are more stocks rising than falling this line will climb higher. Up until recently we had been seeing confirmation from the advance-decline line for the up trend in the S&P. The current slight divergence isn’t a red flag yet as it can be easily corrected. If the advance-decline line weakens further and begins making lower highs, then I’ll begin to grow more concerned.

On the bottom panel of the chart below we have the percentage of stocks above their 200-day moving average. It’s often thought that a stock is in an up trend when it’s above its 200-MA. We can use the percentage of stocks above their long-term moving average as another way to gauge market participation. This measure of market breadth has caused many traders to grow concerned about the strength of the currently rally, myself included, due to it’s deepening negative divergence from the equity market. While stocks make new highs, we aren’t seeing the same action in stocks above their 200-MA. However, the percentage has been making higher lows, which is constructive for the current rally. Currently I view market breadth as neutral with a slight positive bias.

Equity Momentum

There are three tools for measuring momentum that I like to use on a daily chart. The first is one I often use on the blog, the Relative Strength Index (RSI) which is in the top panel of the chart below. While we are seeing a slight negative divergence in the RSI, it is still firmly in a bullish range as previous periods of weakness in price have been unable to push the indicator into ‘oversold’ territory (below 30.) Next up is the MACD indicator. This indicator has been flattening out over the last few weeks, which is slightly worrisome. Finally, in the bottom panel of the chart is the Money Flow Index, which works like the RSI but incorporates volume. Despite the potential for a divergence, nothing quite concerning here.

S&P 500 60-Minute Chart

To take a step further in looking under the hood of the equity market I like to watch a 60-minute chart of the S&P 500 ($SPX). What I’m looking for here are short-term levels of support and resistance as well as confirmation in measures of momentum. Right now, we have established support just above the 1800 level, as show by the dotted purple line. Looking at momentum, we have a slight divergence in the Relative Strength Index in the top panel of the chart. While the price action has headed higher, RSI has been making lower highs over the last two weeks. We are also not seeing confirmation in the MACD indicator, another measurement of momentum. I’ll be watching to see if the previously mentioned level of support holds up as well as the 50-1hr moving average.

Last Week’s Sector Performance

Below is a chart of last week’s sector performance. Being a shortened holiday week, it’s not surprising we didn’t see much movement in the major S&P sectors. The leading two sectors were technology ($XLK) and consumer discretionary (Cyclicals $XLY) with energy ($XLE) being the worst performer.

Year-to-Date Sector Performance

For 2013 the leading sector has been health care ($XLV), followed by consumer discretionary ($XLY) and industrials ($XLI). The utility sector ($XLU) continues to show the weakest YTD performance.

Bonds

To represent the bond market I’m using the iShares Aggregate Bond ETF ($AGG). We’ve seen some nice strength in bonds off the Sept. low, even in the face of a strong equity move. At the close of last week it seems $AGG is creating a wedge between its 200-day moving average and 50-day moving average. Things still look bullish for bonds but I’d like to see a breakout above the 200-MA.

International

Off the July low we had been seeing some relative performance strength out of the iShares EAFE Index ($EFA), as shown in the bottom panel of the chart below. However, domestic stocks have taken back the reigns and have been leading for the last month. Looking at the top panel of the chart, at the Relative Strength Index, we have some nice support just under 50 as buyers continue to step in to buy dips in $EFA. If price continues to rise I’ll be watching for potential resistance at the October high.

Commodities

The commodity markets have just been awful this year. I highlighted one potential bright spot last week, but on a relative basis there hasn’t been much to like in commodities. The RSI indicator is approaching resistance as $DBC, a commodities tracking ETF, struggles to break above its 50-day moving average. The trend in commodities is firmly negative.

Major Events This Week

While my focus is always on the price action, I think it’s important to know what major economic data announcements are approaching. Here’s a list of what’s being announced this week:

Monday: ISM Manufacturing
Tuesday: Motor Vehicle Sales
Wednesday: New Home Sales, ISM Non-Manufacturing, and Beige Book
Thursday:Jobless Claims and GDP
Friday: Non-Farm Payroll

What I see for the Bond Market

Posted on September 17, 2013 by Andrew Thrasher, CMT

There’s been a lot of discussion on the bond market, mostly due to the Fed-induced anxiety as we get an FOMC announcement tomorrow. I’ve been asked a couple of times what I think of the bond market, and so I thought the topic was due for a post. So here we go…

I”m going to use the iShares Barclays Aggregate Bond ETF ($AGG). Could very well use iShares Barclays 20+ Year Treasury Bond ETF ($TLT), the charts are fairly similar. Since the bond market’s most recent peak in April of this year they have gotten destroyed. You’d have to look at the 1994 bond disaster to find similar total return destruction.

Can anything positive be said about bonds at current prices? I would say yes. First we have the latest bout of price action. $AGG seems to be finding support at the 38.2% Fibonacci retracement off the 2011 low which was just under $97. We’ve now had three tests of this retracement level with only a slight intraday break earlier this month. This needs to be the bond bulls line in the sand if they are to take a stand any time soon.

Next up is the positive divergence in momentum. In August as the Aggregate Bond ETF was testing the June low, the Relative Strength Index put in a higher low and repeated this pattern again in September with yet another higher low, this time above ‘oversold’ territory. As to be expected the RSI indicator has been hitting resistance at the upper end of the bearish channel around the 50-55 area. Bond bulls desperately need to get the strength to break above 55 and make a march to higher momentum levels for prices to have a chance to follow.

Turning our focus back to price we have the 50-day moving average. Twice during the multi-month descent have we found resistance at the 50-MA – most recently yesterday. While I see positive components of a bullish bond setup, I need to see a break of the moving average to the upside for the bond trade to gain favor.

The pieces are all there for bonds to rally, not to mention the extreme bearishness in the sentiment data. But I continue to let price guide my bias and will welcome higher prices if bonds begin to confirm the action we are seeing in momentum and turn higher. If not, then its back to the drawing board.