From the desk of Tom Bruni @BruniCharting
My big question coming into this weekend was what should we make of the action in Utilities lately and what does it mean for Bonds?
Utilities are making new all-time highs on an absolute basis, posing this question on Twitter: “So is the breakout in Utilities to new all-time highs a signal that a Bond breakout is coming, or is it simply a bi-product of overwhelming demand for Equities?
This got a lot of attention and responses, so I thought it’d be worthwhile to quickly outline what I’m watching in Utilities and the Bond market over the next few weeks.
For some context, we’ve been erring on the side of higher Interest Rates since late August when Treasury Bonds were very extended above their 200-day moving averages by historical standards. Since then other inter-market signals have begun to emerge, like Commodities breaking out, that would suggest higher Interest Rates are ahead.
With that being said, what sparked this post is the Dow Jones Utility Average breaking out to new all-time highs following a 3-month consolidation. Now Utilities going up aren’t necessarily a flight to safety, they could just be a sign of the overwhelming amount of demand for Equities as an asset class.
Click on chart to enlarge view.
What’s more important here is the Utilities/S&P 500 ratio which has been trending lower since October and is now trying to find its footing as momentum diverges. Is this a signal that market participants are repositioning themselves into the Utility sector? And are they doing this because they’re expecting Bonds to move higher?
We’re also seeing similar action in “Bond proxy” or “defensive” ETFs like the US Low Volatility Factor/S&P 500 ratio. Would a bounce here signal that same expectation of higher Bonds in the weeks and months ahead?
On an absolute basis, price action and momentum suggest that the action since August has simply been a consolidation within a longer-term uptrend. Prices have digested gains and momentum has worked off its overbought condition, not getting oversold on either the weekly nor daily timeframes. Now prices are starting to work higher out of this bull flag.
In some Bond ETF vehicles, such as Municipal Bonds (MUB), that consolidation is already resolving higher and prices are approaching their all-time highs.
With US Equities being a bit extended in the near-term, Utilities/defensive factors catching a bid on a relative basis, and absolute price action and momentum in most Bond ETFs suggesting the long-term trend is higher, an upside breakout for Bonds doesn’t sound too crazy.
If they’re gonna go, I’d expect them to do so shortly.
One other factor that I think is important to consider here is International Interest Rates. Most countries have experienced similar bounces in Rates over the last 6 months and those consolidations are now beginning to resolve themselves lower. If Interest Rates around the globe start to fall off a cliff, US rates are not likely to hold higher in that environment.
There are a lot of factors at play right now in the Bond market. How this “textbook breakout” plays out will tell us a lot about Interest Rates going forward and their intermarket implications, especially on a relative basis where we’ve preferred Equities relative to both Bonds and Commodities.
Something is afoot here, keep an eye out.
Thanks for reading and please let us know if you have any questions!