Bonds Away

The most important development of the week (and maybe the year) took place in the bond markets. As such, it should come as no surprise that last week’s volatility in stocks was directly related to what was happening to bonds. As we see below in the chart of the 20-year bond ETF, TLT, it started the week right on the neckline (support) of the multi-year head and shoulders topping pattern. As the week progressed, the sell-off in bonds gained steam and eventually closed out firmly below support. Investors under 40 years of age, and possibly even 50 or older (depending upon when they started investing) have never experienced a declining bond market. So, for most a potential bond bear market is uncharted territory.

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As you know by now, all patterns are not relevant or meaningful until they have a confirmed close. A confirmed close we have but we need to see the neckline hold as resistance in the coming trading sessions. If so, the 20-year bond has a tough row ahead as the first target is down at T1, and the second is back at 2013’s lows, some 20% below where we started the week.

The table below shows an example of what bond holders across different types of bonds could expect with only a 1% rise in rates and why this potential breakdown is such a big deal. Not every rising rate period is exactly the same so your mileage may vary. What stays constant regardless of the period is the fact the longer the maturity, the greater the expected decline.

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September 2018 Charts on the Move Video

The bulls were out in force as we closed out the third quarter. With the expected year end rally, 2018 looks to be another strong year for the market…. the US stock market. Bonds, commodities and foreign investments continue to under-perform and act as an anchor to portfolios. Mean reversion will eventually show up but, based upon the charts, Q42018 seems like more of the same.

My Q3 recap video can be viewed in the link below.


Muni Bombs

Regular readers should be comfortable knowing investment price patterns develop, repeat and understanding the reasons why. A great example of this can be seen in the US Muni bond ETF, MUB. Over the past 7 years, a head and shoulders topping pattern has formed 4 times. Of the first 3, only two actually played out to or beyond the pattern’s lower target. The middle one failed and reversed strongly higher (“from false breaks come big moves”) where it went on to make pattern #3. Interestingly, all of the first three formed their peak (head) when RSI momentum (the upper pane) entered and then exited the overbought region which is not the case in the current. Muni bond holders want to keep an eye on the present pattern and insure price holds at or above the neckline otherwise risk the possibility of much larger decline.

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If you change the time frame on above chart to 5 years instead of 7 thereby removing the first pattern nearest the left edge of the chart and clean it up a bit something interesting appears … a  4+ year head and shoulders topping pattern.  

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As you can see, it still has some room before it reaches its neckline and the pattern could trigger. Take a look at volume in the bottom pane. Notice how during the 2015 selloff from the head, you started to see big green bars as it broke below the neckline, an indication the big institutional buyers were stepping in. If I were a Muni bond holder right now I hope to see those big buyers step in once again as/if we approach those same levels. If not, I will be thanking the investment gods above I am not a holder of any Muni bonds as it could just be bombs away lower.

July 2018 Charts on the Move Video

US stock markets are leading the rest of the world higher.  The intermediate term rally in the dollar has either reversed or put the case for over-weighting foreign investments on hold. I think we muddle through the summer/autumn months and then rally into year-end.  Anyone thinking the same? 

July's Charts on the Move video can be viewed at the link below




June 2018 Charts on the Move Video

Yawwwwwwwn.   Sideways chop within the Jan -Feb consolidation range until we see a catalyst. I thought maybe trade war fears would be enough to break the trend but apparently not.  Bulls are still in charge.  I don't expect to see a resolution for months so until then, sit back, enjoy the summer and check out this month's Charts on the Move video at the link below  ...