I get it, most people think that bonds are boring. And for the most part, they’re right…
Until they’re not, which is the time to listen.
During the 2007-08 financial crisis, some of the most exciting trades came from the bond market.
First, the bond market is larger than the stock market.
Second, the bond market is primarily made up of institutional money, not retail.
Third, because of that institutional aspect, bond traders take a much longer view of the market forecast than stock traders.
Want to see it at work?
In 2021, we saw a rollover in the bond market begin in July, six months ahead of the S&P 500’s top. Just one month ahead of the stock market’s failure, the bond market started its precipitous drop.
For those watching, those two moves tipped the stock market’s hand that the bear market was inevitable.
Today, we’re facing a mirror image as bonds are once again revving-up for a bull market move.
In October, just ahead of stocks, shares of the iShares 20 Plus Year Treasury Bond ETF (TLT) formed a technical bottom as the first signs of buying strength formed a trend.
Shortly after that, names like Bill Gross and Jeffrey Gundlach – two titans in the bond market – took to the airwaves to announce the death of the bond market bear.
It takes a lot for these guys to put their name on the line, and frankly, I called shenanigans on them at the time – but they may have made the type of call that defines your legacy.
But the fight isn’t over, and the next 5% move in the TLT is going to be the most important.
Check out the chart below. Tuesday’s closing price for the TLT lands it a mere 5% away from moving above two critical technical levels.
First, the $100 price level.
Markets love round numbers and the more zeros, the better. They’re considered heavy psychological “triggers.”
TLT shares moved below the $100 price in July 2023 and didn’t look back as the shares tumbled 19% in just two months.
A move above the $100 is likely to draw buyers back into the bond market, especially on the heels of the bond “titans” mentioned above.
Next, a move above $100 will signal a break above the TLT’s 20-month moving average.
This is an important technical trendline that is often watched by the market and trading algorithms.
The 20-month moving average is used as the technical line of demarcation between bull and bear market trends.
That’s right, a move above the $100 level puts the bond market into a bull market trend for the first time since December of 2021.
This tectonic shift in the bond market, should it happen, will trigger another wave of buying power into the stock market that could start 2024 out on the best footing it’s had in years.
Here’s how we turn this trend shift into profits…
Obviously, I’ve started adding TLT shares to my portfolio. Last week, I was following the resurgence of the 60/40 portfolio. The last bull market breakout led to a 55% return for TLT shares in only 16 months.
More aggressive traders may want to consider the ProShares Ultra 20+ Year Treasury (UBT). This ETF offers a tool for investors to leverage moves in the bond.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant – like the “rocket scientists” of investing – with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street’s data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It’s the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron’s, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.
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