Bond Model: Failed Signal?
It appears that our bond model will yield a sell signal at the end of this week. I use the word “appears” because my models utilize weekly data, signals are generated at the end of the week. As I have stated on several occasions, the technical picture was looking rather weak despite the positive signal from the bond model. So it seems likely that the fundamental model will be in sync with the technicals by the end of the week. We just need to wait until the end of the week to confirm this.
False signals happen, and that is ok. Nothing is perfect. Fortunately we aren’t staying around too long on this trade. The more important question is how this will impact equities? When I highlighted the bond model turning positive on Monday, I stated that such signals usually meant “risk off” for equities over the past 3 years. Equities did poorly when the bond model was positive.
So does this mean a sell signal from the bond model will mean strength in equities? Is it “risk on” again? In this case, I would say, “no”. As it turns out, the spike in yields we are seeing this week is occurring while there is strength in the trends in gold and commodities, and this is a strong sell signal for equities as inflationary pressures are heating up. I have discussed these dynamics in great detail in the past.
So to summarize. Our bond model will likely yield a sell signal at the end of the week. In addition, the spike in yields along with strength in gold and commodities is a major headwind for equities.
For the record, figure 1 is a weekly chart of the i-Shares Lehman 20 plus Year Treasury Bond Fund (symbol: TLT). The close below the prior key pivot at 128.52 is a double top, and it is confirmed by a close below the lows of the negative divergence bar (labeled in pink).
Figure 1. TLT/ weekly
Category: Bonds, commodities, Equities
hi dr lerner,
recent history shows yields leaping higher when the S&P breaks to new post-correction highs. if we best S&P 1422, we should see the 10 year push toward 2%. at that point the 10 year will be a strong buy. specifically once 10 year futures hit ~131.25. you can see a clearly defined rising wedge in this chart.
http://finviz.com/futures_charts.ashx?t=ZN
cheers,
erik
Hi Erik
I wasn’t so much concerned that yields are rising and if they do, I don’t anticipate this being the end of the bull market in bonds yet. That story is for another day.
The point of the article was that increasing trend strength in 10 year Treasury yields, gold and commodities is bearish for stocks…we are close to that point
i agree that bonds have not seen their low yields yet, not even close. and if they see 2% it won’t hold for long. japan has been capped at beneath 2% for a long, long time