Bullish Bonds, Bullish Banks, Beware the SPX

Three topics to discuss today. Canadian vs. US bonds, a warning on the S&P 500 chart, and a look at the US banking sector.

Canadian vs. US bonds

We’re bullish on US long bonds. Bonds can do well as inflation falls, allowing monetary policy to soften. But we’re not quite as hot on Canadian bonds on a relative performance basis. We have focused strictly on US bonds. We hold a position in the US TLT long bond ETF.

Canadian bonds may not fare as well as US bonds going forward.

Lots of debate around the “carbon tax” of late. Bottom line, whether rebates match the tax (or not) for ordinary consumers, business (particularly small business, who are hurt the most) does not get a carbon tax rebate. As such, increased fuel prices are passed on through price hikes right through business supply chains – production, heating, warehouse, shipping, etc. This impacts inflation, which impacts CDN bonds.  Canadian bonds are under the threat of stagflation more than US treasuries. A very good explanation of the math behind carbon tax inflation here. Its aimed at persons above the IQ of certain part time drama teachers.  I know you’ll understand it.

Keep an eye on divergences in relative strength between CDN vs. US bonds.

One of the best Canadian long termed bond ETF’s is the iShares XLB ETF. I’ve pitted that fund against the US long bond ETF, TLT. See the chart below. My notes are on the chart.

Beware

“The longer and the more that the market continues to stretch to the upside, the more abrupt and pronounced the near-term pullback/digestion of strength could be. There is certainly a negative skew in the near-term risk-reward that traders have to be cautious of when considering adding new positions, but there is certainly nothing to suggest that the rising path of prices is ending.” Jon Vialoux, EquityClock

Per Jon’s comment…
There’s no indication of the current trend ending…yet there is a measure of caution we must take given recent market moves. My chart below suggests that, if history repeats (and it does), then the current parabolic move off of the trendline that began after the 2022 bear market is due to be retraced back near that trendline sooner or later. Remember, markets can correct down, or sideways to return to trendlines.

As an aside, I presented to the CATA (Canadian Association For Technical Analysis) on Thursday. Participating in the audience was a long time Technical Analyst I respect, Ron Meisels. Ron noted after my presentation that he follows a 4 year market cycle. This cycle is due to put in another pullback in 2024.

US Banks look bullish

Last week, on this blog, I covered the Canadian banks. That blog uncovered a couple of very attractive opportunities in that sector. Today, I won’t do such a deep dive on the individual US banks, but I thought I’d take a broad view of the sector.

Here’s the seasonal chart for the sector. Note that we are in the sweet spot until May, after which it can level off in performance and even start a period of underperformance. Still, there’s well over a month left in this period of strength.

Here’s the Bank index chart. Note the neckline breakout. Target is to reach the former highs, which are well over 10% from here. MACD was showing positive divergence prior to this breakout. Momentum is a bit overbought.

Canadian investors can buy the sector with a currency hedged ETF such as the BMO US Bank Equal Weight ZUB. It shows similar patterns to the bank index chart.

Or, you can look at the top US listed banks individually. The list includes JPM, BAC, C, WFC, GS, MS and USB.

 

 

 

 

2 Comments

  • Thank you. I remember Ron Meisels on BNN 20yrs ago. Glad to hear still kicking. I would take a sick day from work to listen to Ron. (With no sick pay). Also this spring I’ve had this saying going on in my head. “Sell in may and go away”. Plus the US election could add a lot of uncertainty in the market this year? The Left has pulled all the stops, to keep Trump out of the election. How far will they go? Very strange & scary times.

    Reply
    • Thanks Rob
      Never understood why so much time was dedicated to “online hate speech” against Trump, while Trudeau calls anything aimed at him “online hate speech” and labels it unacceptable. I know that the WEF dedicated one of their themes at the most recent event to “what are we going to do if Trump is elected”. Fact is, he is one of the few world leaders who will not go along with the Great Reset agenda- he cannot be controlled, so the Left will do their best to destroy him prior to the election. Scary times, indeed.

      Reply

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