TLT). – Andrew Thrasher

Will We See A Shift Out of High Yield Bonds and Back to Treasury’s?

Posted on November 16, 2016 by Andrew Thrasher, CMT

Since the election last week the markets has been digesting the new set of expectations with regards to where growth is expected to increase (small caps, biotech seeing large pops) or decrease (large cap tech). The same type of movement is also taking place in the bond market with Treasury’s seeing a fair bit of weakness as rates rise. The 10-year Treasury yield is now at its highest level for the year with many bond ETFs seeing their lowest levels. On a relative basis, high yield debt has not been hit as hard as government debt, which is the focus of this post.

Below is a ratio chart comparing the iShares High Yield Corporate Bond ETF ($HYG) vs. the iShares 20+ Year Treasury Bond ETF ($TLT). As a reminder, when looking at a ratio chart like this, if the line is rising then the numerator, int his case, $HYG, is rising more or falling less than the denominator (i.e. $TLT). This is a great way to be able to analyze two markets and see which one has stronger relative strength. The second half of 2016 has seen a shift to favoring high yield debt over Treasury’s. This increase in relative performance has sent the Relative Strength Index (RSI), a momentum indicator, to a historically high level. In fact, we’ve only see four previous instances where the RSI has been this high for the HYG/TLT pair since 2007.

As shown by the dotted blue lines, when RSI has gotten this high in the past we’ve typically seen a reversal in relative strength. Three of the four prior occurrences (2007, 2010, 2015) were substantial shifts in trend while the instance in 2012 didn’t have a complete about-face in relative performance, we did see TLT pick up a little in relative performance for several weeks before bottoming out and $HYG continuing to lead for the bulk of 2013.

So while the sample size is extremely small, it does appear the trend for high yield debt leading Treasury’s has come to an impasse. Momentum has become stretched and this elevated reading in the RSI can be resolved in two ways…. through time, which means we could see a consolidation in the $HYG/$TLT ratio or a reversal in trend. However, as we saw in 2013, the magnitude of the trend reversal may not last very long or produce dramatic changes in the overall trend.

The Relationship Between Stocks and Bonds Remains in a Range

Posted on September 28, 2016 by Andrew Thrasher, CMT

Miss me? I haven’t been as active on the blog as I would like but I still share quite a bit on Twitter and StockTwits, so make sure follow me there to keep up with my insights and charts. Anyway, let’s get into it…

We are close to finishing out the historically bearish period of seasonality for equities and while we didn’t see any kind of crash that many traders were ~~hoping for~~ expecting, the S&P is up nearly 4% and saw just a 5% drop back in June. Overall, not a terrible summer when all things considered.

The chart I’d like to discuss today is of the weekly un-adjusted (not accounting for dividends) ratio between the S&P 500 ($SPY) and 20+ Year Treasury Bond ETF ($TLT) over the last seven years. As a reminder, when $SPY is outperforming $TLT the line rises and when the opposite happens the line declines, this doesn’t mean equities are appreciating, it simply shows which data set is rising more (or falling less) than the other.

I think it’s important to monitor the relationship between stocks and bonds and that’s exactly what this chart helps us do. The ratio between these two markets has been in somewhat of a range since late-2013 as it has been unable to produce a meaningful new high or lower lows. This creates a consolidation triangle pattern that we can view as levels of support and resistance with regards to the relative performance of $SPY and $TLT.

As the chart below shows, the ratio has found prior support at 1.45, which if broken could see a decline down to 1.35 which is the last significant area of price memory (2010 turning point and 2013 slight decline). On the upside we have a declining trend line connecting the lower highs since 2015. A break here could see $SPY outpace $TLT with the ratio rising back to its prior high around 1.80. To better gauge a break of either resistance or support (one will eventually have to happen whether it’s due to pacing of time or price movement) I’ll evaluate trend strength (not shown on chart) to better understand the potential the break has ‘staying power’ and the potential of a false break or reversal. But at this point, we have our levels and can be patient, allowing the market to dictate a bias.

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.

Stock Market Hits New Highs But Lacks Confirmation

Posted on May 14, 2014 by Andrew Thrasher, CMT

While the S&P 500 breaks through 1900 and traders rejoice over the fresh new high, it seems the same level of excitement is not being felt in other parts of the market. There are multiple divergences that are taking place and showing a lack of confirmation. On my blog I’ve discussed multiple times the lack of participation in momentum for the S&P 500, but we can also see divergences in bonds, small caps, and defensive sectors showing leadership. However, the two measures we are seeing excessive risk taking in are the Put/Call Ratios and the Volatility Index which is sitting at historical lows. The other measures I follow appear to be negatively diverging from the overall equity market. Below are some examples.

Below is a chart I referenced earlier this year; it shows relative performance of High Yield Corporate Bonds ($HYG) vs.U.S. 20+ Year Treasury’s ($TLT). In the bottom panel we have the 10-Year Treasury Yield ($TNX). For the bulk of the current bull market we’ve seen these two measurements for the bond market confirm the movements in equity prices. As stocks go up, so does the ratio between HYG and TLT as investors show preference for the more risky high yield market over government debt, and same for the 10-Year Yield which often moves with the stock market. However, that’s now the case today. We have a glaring divergence forming in both measures of risk within the bond market, something we haven’t seen since the 2011 and 2012 highs.

Next we have a chart showing the S&P 500 ($SPX), PowerShares Nasdaq ($QQQ), and the Russell 2000 iShares($IWM). While the S&P hits new highs the Nasdaq and Russell 2000 are off nearly 5% from their 52-week highs. SentimenTrader.com wrote in a recent note that some examples of past instances of this occurring are: 1983, 1987, 1990, 1998, 2000, and 2006. Jason wrote that the eventual ‘reaction’ of this divergence in the S&P 500 varies in length, “from immediately (’83, ‘90’, ’00) to over a year (’06). If traders were feeling more confident in the upswing in stocks, why aren’t they bidding up these higher beta indices?

To keep reading and see the rest of the charts: Stock Market Hits New Highs, But Lack of Confirmation Concerning (See It Market)

Weekly Technical Market Outlook 3/7/2014

Posted on April 7, 2014 by Andrew Thrasher, CMT

I hope everyone had a good week last week, I apologize for my lack of activity on the blog or on Twitter/StockTwits. I was in NYC for the Market Technician Association annual symposium. This was the first year I’ve attended the event and it was well worth the trip. We heard some excellent speakers from Ned Davis and Greg Morris to John Murphy and Ralph Acampora. JC Parets wrote a great post yesterday with some highlights from the event, definitely worth a read. It was awesome meeting many of you that I’ve connected with through Twitter and my blog as well as lots new traders from all over the world that came to the conference.

While I was away I did not get to spend nearly as much time watching the markets as I would have liked. Reviewing the price movement, we had some increased selling on Friday as the S&P 500 ($SPX) broke back through the previous March high. Equity bulls would have preferred to see that level hold as support. While it ‘felt’ like a panic selling as we cut through would-be support, we only saw roughly 70% of volume come from selling and 60% of issues trade down. Typically we see these numbers hit 80% or 90% during panic selling.

Equity Trend

The up trend is still intact for the S&P 500 ($SPX). If the sell-off that began on Friday continues I’ll be watching the previous low set in March to hold as potential support since the March high has already failed. We closed out trading last week with price just a few cents under the 20-day Moving Average, which I believe is positive for bulls as some would argue that the MA was not ‘fully’ violated just yet.

Equity Breadth

A few weeks ago I showed a chart of the number of New Highs minus New Lows totaled for the week. I mentioned that while the Advance-Decline Line was still showing strength, this indicator, that looks at the number of New Highs, was making lower lows. With the new all-time high in price last week for the S&P 500, we yet again saw another new low in the net number of New Highs minus New Lows (not shown).

As the chart below shows, the Advance-Decline Line held up well during heavy selling on Friday. This measure of market breadth is still above its short-term trend line and well above its long-term trend. The Percentage of Stocks Above Their 200-day Moving Average confirmed the higher high last week and stayed above its level of support on Friday. From a breadth standpoint, things still appear positive with the Advance-Decline Line still above its March high.

Equity Momentum

Once again we saw another lower high in the developing divergence in the Relative Strength Index (RSI). In my opinion, momentum is currently the biggest concern for the uptrend in the equity market. While we still have fairly strong breadth as mentioned above, momentum has continued to weaken. On any further selling I’ll be watching the 49 level as support for the RSI indicator as marked by the dotted blue line. The MACD momentum indicator is also still showing a negative divergence, although it was able to make it above its March high which is slightly positive for stocks.

Bonds

It’s been a few weeks since I’ve discussed the bond chart, specifically the iShares 20+ Year Treasury ETF ($TLT). Price continues to trade in a range between $109 and $105. We did see a false breakout two weeks ago, but $TLT quickly fell back into its range. Looking at momentum and volume we are getting two different messages. With the Relative Strength Index (RSI), a negative divergence has continued to develop as it makes lower highs.

However, the On Balance Volume indicator, which adds up the number of shares traded on up days and subtracts volume on down days to measure buying and selling pressure, appears to be showing a bias towards buyers as more shares appear to be traded on positive days. The 50-day Moving Average continues to act as support during short-term sell-offs and since its current rising, is a positive area of support for those bullish on bonds.

60-Minute S&P 500

The 60-minute chart for the S&P 500 ($SPX) has been giving us a lot of clues during the choppiness of trading these past few weeks. I’ve been watching the channel on this short-term chart with resistance at the March highs around 1880 and support at the March lows near 1840.We broke above resistance momentarily and were unable to turn resistance into support last Friday.

As the equity market challenged and broke through the previous high we saw a small negative divergence of lower highs created on the Relative Strength Index. This signaled that buyers may not have been as strong as many would have hoped. While the MACD was able to break its negative trend, Friday’s selling pushed it back under as sellers took over. One positive note is the trend line off the February and March lows. Selling on Friday was halted when this trend line as shown on the chart was hit and I’ll be watching this week if this trend line can hold up and buyers take back control of the S&P. If the trend line breaks then we’ll likely see a test of the March low which will act as a line in the sand before the start of a short-term down trend.

Last Week’s Sector Performance

The energy sector ($XLE) was the strongest relative performer last week. I discussed the chart for energy in March 24th’s Weekly Technical Outlook . Utilities ($XLU), consumer staples ($XLP), and industrials ($XLI) were also positive last week. Consumer cyclicals ($XLY) and the financial sector ($XLF) were the worst performers.

Year-to-Date Sector Performance

Not much as changed YTD as it pertains to sector performance. Utilities ($XLU) and health care ($XLV) continue to lead for 2014. With consumer cyclicals ($XLY) the worst performing sector for the year.

Major Events This Week

This is a pretty light week for economic data with the FOMC minutes likely to garner the most attention. Commentators will likely be interested in reading further detail about the Fed dismissing unemployment as a critical trigger for interest rate policy.

Monday: Consumer Credit
Tuesday: JOLTS Report
Wednesday: FOMC Minutes
Thursday: Jobless Claims
Friday: Producer Price Index

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.