US Treasury Bonds have been a market that we've been watching very closely over the past couple of months. Remember this had been a favorite short of mine since the Summer, but all of our downside targets were hit in the 4th quarter. Since then, it has no longer been a short, and we've been waiting for it to set up to be a long for a mean reversion. Here is what is now going on this week:
I love technical analysis. I really do. There's no question that finding a nice chart brings a great amount of joy to my life. Today I want to share with you what I think is one of the most important developments to occur over the past couple of months. Interest rates have been ripping higher, yes we know this. But to me it's what is happening in Banks and Real Estate Investment Trusts that continues to grab my attention. These groups of stocks are doing the exact opposite today that they were doing at the beginning of 2016, when I was pounding the table about rates going a lot lower.
Interest rates have exploded higher into year-end from a low near 1.37% on the 10-year yield up to over 2.6%. But one of the big reasons that had me so bullish rates since July was that while the 10-year was making lower lows into the summer, the ratio between Regional Banks and REITs held the early 2015 low and started to rally:
Throughout the second half of 2016 I've remained in the camp that interest rates are going higher and that bonds are a fade. The action into 4th of July weekend originally put me in that camp and I continue to believe that, bigger picture, this is the underlying trend that we need to respect. The catalyst here, in many cases, is becoming more and more clear with each passing day. Forget the economy and the stock market, inflationary forces are moving in sync with the bond market suggesting a very high correlation between the inflation trade and higher rates.
Let's break this down using math and blatantly ignore anything the federal reserve has to say. Listening to them has been a time waster and money loser for years. I don't expect this trend to change any time soon. I'm sure they are nice people, but from a portfolio construction perspective, they offer absolutely zero value, and some might argue that listening to the fed is actually detrimental to a sound investing plan. I agree with both the latter and the former: that noise is toxic on all accounts.
You guys who have followed my work over the years know how many charts I look at on a daily and weekly basis. Believe it or not, it's probably even more than you think. Some things pique my interest more than others, of course, but it's the collective weight of the evidence that allows me to formulate a thesis given all of the available information. The specifics include price and sentiment data from stock, bond, commodity and forex markets around the world, most represented visually in chart form.
Sometimes there is a specific scenario in a given market that can impact the direction of the price of a lot of different assets around the world. Today, what I see in US Treasury Bonds is what I find to be the most interesting trade in the world. What is happening in this market? Is this a top in bonds and bottom in rates? Is this multi-decade uptrend in bonds finally coming to an end? It's hard to imagine considering you need to be older than 60 to remember a structural bear market in bonds during your wall street career.
Over the last few years, all we've heard from the financial media and economists are how we're in a "rising rate environment" and interest rates are going up. They keep averaging down on their irresponsible calls because they can. They have no skin in the game. They don't care about making money in the market. The media wants to sell ads and who knows what economists are thinking. As the great Warren Buffett said last year, "Any company who has an economist has one employee too many".
Meanwhile U.S. 30-year yields hit new lows in July proving all of their forecasts to be incorrect (shocking I know). And there is probably a good reason for that. They obsess over what the federal reserve people are saying, and blatantly ignore price action. Rather than focusing on what pays, they instead choose to focus on gossip from a group of people who never stop talking, literally.
U.S. Treasury Bonds have been a short for months (see here), but do we press these shorts or take profits? Today we're looking at what I think is an extremely powerful development over the past week:
We don't have to make things complicated guys. We don't get paid to tell stories and make up reasons for why the market is moving during the day. We are market participants. We are the 99.99% of people in the world who are just here to try and make a profit. We don't have to put together a pitch, or a sexy headline, or ask our boss for permission to do things. We just want to make a buck when the market moves. That's it.
So while all those people out there pretending to be mother goose are making up stories about the fed and inflation and all sorts of noise, we prefer to focus on price, which is literally the only thing that will ever pay anyone in this business. Today we are looking at the chart that has suggested since June that selling Treasury Bonds was the right move, and therefore interest rates would rise.
With all of the major U.S. Stock Market Indexes hitting all-time highs, I think it’s important to see if the bond market is telling a similar story. Are bonds confirming the risk appetite we’re seeing towards stocks or is there a divergence? Based on my work, bonds suggest there is plenty of risk appetite out there globally and therefore stocks should continue higher.
This week I dropped by the News Corp building to chat with Liz Claman on Fox Business. Liz simply wanted to know what we want to be buying and what we want to be selling. I think we need to be watching last year's highs in both the S&P500 and Russell3000. If prices are above those levels, it's hard to be bearish. When you ask what will drive price higher, I'm in the camp that mega-cap tech, which represents over 20% of the S&P500, will continue to be a tailwind for markets.
U.S. Treasury Bonds have been in a beautiful uptrend for 35 years. This is nothing new. But within uptrends, we often see severe corrections that have presented very favorable risk vs reward opportunities in the past. I think today is one of those scenarios. Here are the details:
