Are we about to witness a bond breakout?
We've been watching the long bond (represented by the iShares Barclays20+ Year Treasury Bond ETF (NYSE:TLT)) quietly build a base for the last three months. During that time it has made a series of higher lows and higher highs and now appears poised to challenge the last high at 95. Look here:
The technicals for TLT paint a picture consistent with a sustained bull move, though not without a few hurdles to overcome.
Current resistance comes in at 95, where the long term moving average (in yellow) sits. It also happens to be the level of the last retracement high, so the selling could be significant should the market rally to that level. We think it will.
The Relative Strength Index and MACD indicators are both bullish, having climbed above their respective waterlines over the last few weeks.
The only thing missing from the move is volume. Any breakout above the 95 level should be accompanied by larger than average volume to be considered conclusive and tradeable.
What's more, the weekly chart on the bond is also looking bullish. Take a peek here:
Just last week RSI surfaced above its 'waterline', offering further proof that a bullish breakout may be in the offing. If and when MACD confirms (still could be a couple of weeks off), we could have a genuine long-bond 'buy' on our hands.
What's Behind it All?
In our opinion, the Treasury market's recent success bespeaks a growing defensiveness on the part of global investors, who are also running out of sovereign fixed-income alternatives. U.S. bonds may not be as safe as they once were, but for the average investor, is there a safer destination?
The stock market, too, has been witness to an increasing investor defensiveness. Though the whole market has been climbing, a look at some of the more successful sectors of late speaks of a clear urge to avoid risk.
Here are charts of recent action in the Utilities, Health Care and Consumer Staples sectors:
Add 9.6% to your utility dividend and you're doing quite well. Here's Health Care:
Even better returns here.
These three defensive sectors have surged as the market processed the latest earnings and economic data. That doesn't bode well for the market in general – nor does the parabolic nature of the above three charts bode well for the sectors in question.
Should a very long-awaited correction now begin, it will have been forecasted by both the long bond and these three defensive sectors.
And Silver?
Silver, too, has been doing some forecasting of its own, both regarding the price of commodities in general and of the price of silver itself.
To put it bluntly, the magnitude of the silver selloff we've just witnessed, however you want to account for it (wild margin requirement raises, for example), is a sign of sideways movement (at best) or a more significant retracement for the intermediate term.
Here's silver's latest action:
The fall below the 50 day moving average occurred with hardly a day's hesitation and puts immediate overhead resistance on the metal at $43. Anyone trading silver would be wise to consider bailing at any counter-trend rally to that level.
We're now in line with premium newsletter writer, Hugh L. O'Haynew, who pens our weekly Wall Street Elite , when he says the days of commodities and precious metals market excitement will now take a back seat to equities, where liquidity flows have yet to create the same elevated risk profiles we've seen in commodities like silver over the last half year.
Hugh recommended buying ZSL CALLS two days before silver's most recent top was put in, and subscribers are cleaning up on the trade. ZSL is a double inverse leverage ETF, moving up $2 for every buck lost in the silver pits. The options only add to the leverage.
To Sum, Friends
As we suggested in last week's instalment of Bourbon & Bayonets, it may not be about economic fundamentals anymore. With corporate earnings offering a reasonable show of growth, we've very likely begun to witness a shift in money flows, out of once hot commodities, into bread and butter, big cap stocks.
Time for you to shift, too?
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
