Long bonds: a contrarian play

 

“When everyone thinks alike, everyone is likely to be wrong”

This is one of my favorite quotes on contrarian thinking, originally stated by H. Neill in his book, The Art of Contrary Thinking.

Bonds have been the recent whipping boy of the investment world. After last years “taper tantrum” bond market selloff, bonds have been shunned in favor of equities and other risk assets. However, there an interesting development on the long bond that may be worth observing for the technical trader. It’s a bit of a contrarian view to say you are bullish on bonds right now. But the charts are suggesting that traders may be able to take advantage of at least a near-termed upside potential on both US and CDN long bonds.

Take a look at the US 20 year bond, as shown on the TLT ETF below. I’ve drawn a neckline on what appears to be a “Phase 1 breakout” (see my book, Sideways), which looks like a double bottom formation. I’ve marked first and second levels of technical resistance on the chart as potential targets. It is my opinion that the US long bond will have upside during the seasonally strong period for bonds over the summer – perhaps to target one of these two resistance points.

 

 

TLT SHORT

The chart of the Canadian long bond, as illustrated by the iShares Scotia Long bond ETF XLB,  shows a possible head and shoulders “Phase 1 breakout”. First resistance has been taken out by this ETF, and the target of around $22.50 is looking imminent. It might appear that the comparative upside potential may be a little less significant for the Canadian market compared to the US long bond. Nevertheless, both are attractive for what appears to be good near termed upside potential.

xlb

To quote another investing guru, “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”-Sir John Templeton

Now may be a reasonable time to hold some longer duration bonds in your portfolio for a 3-6 month trade.

Upcoming speaking engagements:

Cambridge, Ontario: Idea Exchange, 1 North Square, Cambridge, ON N1S 2K6. Tuesday April 29, 2014, 7PM (here is a link to find out more about this seminar: http://www.therecord.com/community-story/4479738-business-author-in-preston-next-tuesday/ )

Guelph, Ontario: Guelph Public Library Main Branch, 100 Norfolk Street, Guelph, ON, N1H 4J6. Tuesday May 6, 2014, 7PM

Markham: Markham Public Library- Markham Village Library Branch, 6031 Hwy 7 E, Markham, ON L3P 3A7. Thursday May 15, 2014, 7PM

 

4 Comments

  • You have written and stated on BNN that now would be a good time to reduce beta in a portfolio. I am having difficulty finding a source for beta. Could you recommend a good site for that, or is there a good alternative such as standard deviation?

    incidentally, your blog today is particularly apropos since I bought some Scotia long Bond late last week.

    Reply
    • Fred–good for you re the iShares long bond trade. I think its a good bet this summer, as my blog suggests.
      As far as beta–I use an expensive subscription to a pro-stock quote system that provides it–you wont have access to it (unless you want to spend $1200/month…)
      But–you can get beta numbers free for TSX stocks on the TSX website.
      I haven’t checked for US beta on the NYSE site, but I bet they offer the same thing.

      Reply
  • Recently on BNN an analyst made the statement “Expensive stocks that have outperformed since the 2009 low, such as in the consumer discretionary sector, are being dumped in favour of the Utilities sector, the sector that has lagged the most over the past five years.”

    It is the last part of the statement I’d appreciate your commentary on.
    I know you have commented on the utilities segment often, in fact I made money following your advice. The question is:
    a) can you please comment on the utility segment at this moment and what you see for that sector over the next 6 months. It is defensive and pays dividends.
    b) ZUT has rallied of late, above the point that you indicated months ago you were/did exit this space. RSI is 61; MACD and STO are trending down. So does one wait until the trend turns, buy now as utilities will rally inside of 6 months, or they are fully priced now, stay away?
    Thanks

    Reply
    • Utilities are near the top of the range here in Canada (ZUT) but he outperformance is likely over the summer as markets go risk – off.
      I don’t hold ZUT except for a few clients who hold it outside of our models and simply want the dividend.
      I don’t plan on buying at this point, but that’s not to say it doesn’t have at least a flat to possibly small upside–which may best the broader market!

      Reply

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