A Technical Look at Long Bonds

August 19, 2023No Comments

Hello and welcome once again to the Smart Money Dumb Money Show. And I am your host, as usual, Keith Richards. I am Chief Portfolio Manager and president of ValueTrend Wealth Management, and I’m a technical analyst. And today we are going to talk about bonds. Now for some of you who watch the videos regularly, you’ll maybe have seen the video that I did with Head of Fixed Income Management at BMO Capital Management and his name was Matt Montesoro. I think that was his last name. I’m actually going to take a quick look. It’s actually Matt Montamoro. Sorry Matt, if I’ve muffed that one. So, Matt Montamoro conducted an interview with me on this channel to talk about the opportunities that he sees in long bonds. And I wanted to take a look at the technicals ’cause we mostly talked about his larger picture views.

And I like looking at things as you know, with charts. So today is going to present a few factors, including the stuff that I like looking at, like the chart pattern, the momentum patterns, the seasonal patterns, and the sentiment. Look at the long bond. We’re going to take a look at both Canadian and US long bonds. You’ll notice that they’re relatively similar, a little bit of difference. So let’s just get right to a slideshow that I’ve put together just so you can see all the different slides that I want to show you. So this will start off with the equity clock seasonal pattern. And you can see that I’m recording this very close to the middle of August, and there is typically a very sharp spike on the bond market in August. This hasn’t been really happening, as many of you know. So this is a seasonal tendency, not an absolute, but keep in mind that seasonals for the bond market actually can be okay into the fall.

You can see that there’s sometimes a dip in September, but on average the TLT long bond ends up higher around the end of September, beginning of October than it was at the beginning of August. So net net we should be in a good period from a seasonal perspective, but that’s just a tendency. So we wanna look at the other factors. So let’s take a look at those factors. One of those things I like looking at is the sentiment reading on the markets. So sentiment means our investors of different types, bullish or bearish on the group. And the concept is that if people become too pessimistic, then that actually signals a buy because there’s a point of washout in any security when people become too pessimistic. The other side of it is when people become too bullish, then there is a point of wanting to get out of that security or sector.

So you can see this is a chart, it’s, it’s really only since the beginning of this year. So it’s not that long. It’s roughly eight months long, seven and a half months long, I guess. Um, and you can see that, that tendency has happened. This is the sentiment, trader optics, which is, an optics, is basically a collection of all the different sentiment indicators that they look at. So that can include, you know, what I often refer to as the smart money, dumb money. So what is, what are commercial traders doing versus retail investors? It looks at things like, flow, it looks at spreads. So things like option spreads, we all know about the put-to-call ratio, that kind of thing. The VIX, these can be sentiment indicators because options get more expensive when people are hyped up or afraid, the premiums expand on puts and calls accordingly.

So all these different factors are kind of squished into one indicator that they call the optics. And it’s a little jig jaggedy because it has a lot of moving parts to it. So I tend to look at these optics readings that SentimentTrader.com issues in clusters. So if we look at this cluster, for example, back here at the beginning of the year, you can see that the general cluster was that people were relatively optimistic about the TLT, the long bond 20-year bond in the US. And you can see that was around the time of a peak. You can see there was a cluster here where investors of different types, including options and pros and retail investors were fairly bearish on the long bond, the TLT specifically ETF. And that’s when a bottom was put in and the market went up.

So again, I’m looking for clusters. You’ll see that when there was kind of no real cluster hanging out, the market didn’t do much for the TLT. So we wanna see kind of repeated levels of optimism or pessimism. We did get one of those levels by the way, back here that did signal a short-term top. So we’re getting a cluster here, that looks a little bit similar to that scene in February where we’re starting to see people, whether they are commercial or they are options traders, or they are retail investors are getting pessimistic about the long bond. Now this, as you can see, and if you went through a longer history on this optics you’ll see it can it can last for a while. So this cluster lasted well into a month and we’re only a few weeks into the sort of pessimistic cluster right now.

So we could see another week or two of, you know, kind of, bearish sentiment on the long bond before it potentially signals a buy. Now again, it’s like seasonality. It’s not an absolute, it’s just another factor. But there is a bit of a setup here that if the technicals, and we’ll look at that in a second, but if the technicals start looking good, we could see a move on the long bond. So let’s take a look at the technicals, we’ll look at the TLT, which is the US 20-year bond, and it’s an ETF. So what we’re looking at here is the chart pattern, which you can see the pattern was bearish and then it began to consolidate. It’s no longer making those lower highs, low lows. In fact, if this low holds that we’re seeing right now, we’re starting to see ascending lows.

But that’s to be seen ’cause it could easily break. It’s right on that miniature trend line that I’ve, that I’ve drawn here. So just be aware though, that there is some long-term support that has become resistance that the TLT will have to get through. But, typically when you see this kind of a pattern, it can imply a base. And if that brace breaks, in other words, if you see this level of, let’s call it $110 break on the TLT, that could be extremely bullish. So other factors that we can pay attention to are the momentum indicators. You can see that in the past, going back, and this is a pretty long chart, so this is a monthly chart I should note. You go back to 2014 when you got oversold stochastics, oversold RSI, and oversold MACD that began hooking up on all three.

You got a rally and that occurred a couple of times in the past where you had these hooks and it led into bull market rallies on the TLT. Well we’re kind of in one of those setups right now, aren’t we? We are seeing a hookup on stochastics on RSI from an oversold level. In fact, the most oversold it’s been in a while from the RSI perspective and a very deeply oversold MACD and it’s trying to hook up. You can see the histogram here is moving favorably. Which is actually a little bit of a negative divergence like against the pattern, which really hasn’t moved in the same pattern. The MACD is looking better, but it may stall here. You can see that the, longer line is attempting to pass through the shorter MACD signal line and it hasn’t happened yet.

So let’s just see if it does manage to hold out. Working against that is money flow. And you can see this is accumulation distribution line. It’s a cumulative line of money flow into the, uh, ETF. And this is again, going way back to 2009. So this is a pretty darn long chart, but you can see obviously accumulation distribution. People have been bailing out of this ETF since really the latter part of 2021. So we’re well into a year and a half of negative money flow in this ETF. So that’s the that’s the negative here that we’re looking on the chart. The positive is there may be some momentum building and we’ll have to see if that lasts. Again, we also just looked at the optics and that is in relatively early stages being too pessimistic. So there’s some factors there that should intrigue us, but I think from a technical discipline, you’ll want to see that cluster break before you jump in.

Just be aware that this is a possible setup, but not yet an absolute thing. Well, I guess there is no absolute thing in the stock and bond markets are there? This is the TSX, this is the final chart I’ll show you. Sorry, it’s not the TSX, it is the Canadian long bonds represented by the iShares Canadian long bond ETF. I’m using ETFs just because they’re kind of easy to pull up and you can see same sort of patterns, not quite so aggressive back in 2014, you know, with the hookups of the momentum indicators. And another one, in 2019 before a fairly large jump occurred on the market in a similar pattern that you saw on TLT where it fell like a brick and it’s been consolidating. In fact, it’s probably even a little bit better looking

’cause if you noticed on that last chart of the TLT, the market had come down quite a bit because of the Fitch rating, downgrade of late. And we in Canada have not seen that kind of a rating downgrade yet, <laugh>. So this is an interesting setup. Again, you’ve got the momentum stuff and you’ve got a support level and you’ve got a base. We need to see that breakout to prove it. A fairly well-defined MACD signal not looking too bad. And interestingly compared to the money flow that the cumulative money flow into this ETF, it is flat and slightly up and that’s a little different from what we saw on the long chart of the TLT. So all in, I’m going to just finish up by saying that there’s no absolutes here and I’m tying into some of the thoughts that Matt had, which was he’s bullish on bonds.

But I personally need to see that breakout happen before I become bullish on bonds. And I think that there’s a setup there for a good potential for that happening, but it ain’t over till the fat lady sings as they say. You wanna see this actually happen before we jump in and make a trade. If you wanna see that breakout happen to confirm what we are seeing in the setup, it’s a setup for now. If it you see that base cluster breakout to the upside, the setup is confirmed and you can maybe start to leg into the position. So I hope that helps. It’s really my follow-up from a technical perspective on my conversation with Matt and ‘food for thought’ if you’re interested in bonds. See you next time.


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