Over the last couple of months I’ve been pretty vocal about the buying opportunity I’ve seen in Bonds. Back in August the pessimism surrounding treasury bonds was out of control. People would actually get angry with me simply for bringing up the possibility of a bond rally. Like my friend Phil Pearlman says, “that’s when you know you’re probably on to something”. It was consensus that you sell bonds and rates are headed higher. But the way I see it, big sell-offs don’t usually start when everyone is expecting it. Quite the opposite in fact.
We’ve since seen a nice little rally in treasuries over the past few months, but I don’t think that it’s over. When I take a step back and look at the charts of 30-yr futures, or 10yr notes, or the Treasury bond ETF $TLT, none of them look like tops. I review the sentiment data periodically and we’re still near extreme levels of pessimism. To me that’s just more evidence that we’re probably not going to crash from here. So I think for now, worst case is that bonds do nothing for a while.
Today we’re looking at a longer-term chart of 30-year futures – these are weekly bars. There are a few things going on here that we should point out. The first thing is the massive downtrend line from the late 2008 top that connects with the top of the 2010 rally. If you extend this important trendline, it takes us right to the September lows. But it’s not just the line that makes this level meaningful. There is a dashed blue line that connects the March 2012 and March 2013 lows. This dashed line represents a neckline of short-term topping pattern in bonds. The 8.5% decline from the 153 top down to the 140 lows this year gives us a measured move target of 128 for bonds, which is precisely where it bottomed in early September:
To me this 128 is going to be a big level in bonds going forward. When you have several technical factors coming together at the same price, and then the market acknowledges it as well as it just did, we should probably listen. I’ll take that combined with the continued pessimism and err on the long side of the bond trade for the time being.
Just ask around, do you know many people who like bonds? I still don’t. The common sense trade is that rates HAVE to go up from here, and therefore bonds are a sell. But remember, bonds don’t HAVE to do anything. They’ll do what they want. So if we forget about the Washington DC nonsense and ignore whatever the media says the fed should or shouldn’t do and just focus on price and sentiment, bonds are probably still a buy.
What do you guys think? Am I crazy? Is the crowd actually going to be right this time?
Tags: $ZB_F $TLT $TNX $ZN_F