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| "Science Friday" Recommendations (Photo credit: LollyKnit) |
We’re looking at a breakdown in bonds that’s pushing us toward two separate solutions – both of which should pay off handsomely if the retreat in fixed income continues. But first let’s have a look at the bonds themselves.
From nearly every angle it’s becoming clear that there is, in fact, a rotation out of fixed income securities – particularly mid- to long-term investment grade bonds, regardless of the issuer – and into equities. We’ve been trumpeting the likelihood of this for a long time, and recent signs have confirmed for us that there’s no other explanation for what’s happening, in general, in the investment arena.
Last Friday’s trade provides a perfect example. The major stock averages were up strongly on the day, with the Dow breaking above 14,000 for the first time since October, 2007. The S&P 500, which has been setting new bull market highs for three weeks already, notched another new high Friday. Only the NASDAQ, heavily weighted by shares in Apple ((NASDAQ:AAPL), has had trouble besting its bull market highs set back in September, when Apple shares peaked at over $700. They’re now at a relatively miserable $453.
While this new equity market enthusiasm was gripping traders last Friday, the exact opposite was happening on the fixed income front.
Take a look now at three charts: the long bond, represented by the iShares Trust Barclays 20+ Year Treasury Bond ETF (NYSE:TLT); the ten year, represented by the iShares Trust Barclays 7-10 Year Treasury Bond ETF (NYSE:IEF); and the investment grade corporate sector, represented by the iShares iBoxx InvesTop Investment Grade Corp. Bond ETF (NYSE:LQD).
A few things here.
First, all three of these stocks had big drops on Friday, in particular the long bond, TLT (top chart), that fell an impressive 1.3% on the day. TLT also lost hold entirely of its long term moving average (in yellow), and now has no immediate source of support below it on the daily chart. We’ll have more to say on this in upcoming letters.
Look now at IEF (middle chart), the ten year ETF, where, in addition to its drop on the day, we see four times the average daily volume crossing the tape (in blue). That’s the most exaggerated outflow of the three, yes, but we feel it’s symptomatic of what we’re facing in general. We also believe we’re going to see a lot more days like this (with volume) from the fixed income sector as stocks advance.
Look also at IEF’s positioning vis-à-vis its long term moving average. It’s not as dire as TLT, which looks already to have given up the ghost, but it is moving fast toward its own last line of support (in yellow). Finally, LQD, the corporates (at bottom), which until now have been the recipient of the greatest measure of interest from bond investors (due to their superior payout), are also going to be the last to be sold, apparently.
According to LQD’s chart, there’s still one intermediate line of resistance before it reaches the long term moving average, and could therefore hold up longer than Treasuries in the event of a continued downdraft. That said, don’t believe the corporate sector will get off easy. Doom awaits them all. Each in his own time.
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