One of our major investing themes coming into the new year was surrounding the United States Treasury Bond Market. With all of the pessimism out there about bonds, and optimism regarding interest rates, it was clearly in our best interest to take the other side of that bet.
This weekend I was out in beautiful Coronado Island surrounded by some of the smartest guys I know. I presented a bunch of my favorite charts and made my point very clear that I liked both bonds and commodities, as we have all year. Stocks are just an asset that I would prefer to stay away from, or sell short in a lot of cases depending on the country or sector. The guys I was with are sharp. They asked me how bonds and commodities could possibly go up together? One of these theories had to be wrong right?
My answer was simply, “Don’t over think it. In other words, trade what you see, not what you think”.
The questions I often get about my current investing thesis is around whether this is inflationary or deflationary. I’m not an economics guy, since those are extremely lagging indicators for what we do. So it’s more a conversation over cocktails than anything else. I would never make an investing decision based on economic data that is 1) an estimate and 2) revised a million times down the road. What good does that do us?
Now, something interesting has certainly been developing since last summer. Treasury Inflation-Protected Securities (or TIPS) have been carving out what looks an awful lot like a bottom to me. The way they work is that their par value rises with inflation and decreases with deflation, as measured by the Consumer Price Index (CPI). If this indeed is a bottom in TIPS, what is that telling us about inflation? The same thing commodities have been telling us (CCI up over 11% YTD)?
I don’t really worry about the economic consequences, as I am only here to take advantage of price. So this is what I see: A nice big round bottom that has allowed the 200 day moving average to flatten out and begin rising after a steep decline last year:
Momentum in TIPS has also been impressive after starting out this basing process with a bullish divergence in early September. Since then, we’ve seen some slightly overbought conditions, but more importantly, we haven’t seen any oversold conditions. These to me are some of the most important ingredients for a reversal in trend.
As for confirmation, I think it’s clear what we need to see. There is a well-defined downtrend that represents overhead resistance since last summer. This needs to be taken out in order to signal that a new uptrend is in place. So far, everything we need to see has developed. Now we just need a breakout to confirm.
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Tags: $TLT $TNX $TIP $TIPZ $SCHP $IPE