Monday, August 15, 2011

Treasury Tuesdays

Last week, I didn't write on the bond market because of the overall turmoil. However, I did make several observations about the Treasury market throughout the week.
Conversely, the IEFs have staged a massive rally on volume that is nearly 3-5 times the levels of the previous month. The market has printed some incredibly strong upward bars compared to the previous three months. From their recent level of approximately 97, prices have rallied almost 5%. While this is not a rally in commensurate response to the stock market sell-off, it's a big rally for the stodgy fixed income world.

These two charts show an incredibly clear shift in investing trend from risk acceptance to risk avoidance. Traders are dumping stocks (risk based assets) and plowing the proceeds into US government bonds.
And then there was this on Thursday:
The daily chart and its respective indicators are very bullish. All the EMAs are moving higher with the shorter above the longer. The A/D and CMF both indicate money is still flowing into the market and the MACD is still very positive, telling us the market's momentum is still strong. However, notice the candles are a bit above the EMAs, indicating the market may be slightly over-extended at this point. A pullback to the 10 day EMA would make tremendous sense, especially as people start to take some profit off the table.

However, there is still no indicator of a sell-off developing.
Despite the S&P downgrade, the Treasury market is still considered a safe haven investment, so it is catching a bid as a place to put stock market sell-off proceeds and safe have money in general. Let's take a look at the charts:

Over the last four days, the IEFs have consolidated gains. We see an initial consolidation in the 102.6 - 103.4 area followed by a sell-off to 101.6 -- a price level established on Monday, August 7. Prices rallied a bit and then consolidated again iin a tight range of 102.4-102.8.

Another way to look at recent price action is we're seeing a triangle consolidation, although the lack of a firm move between the lines doesn't rest well with me.

The daily chart shows a bit of a sell-off. However, prices are still above the 10 day EMA and looking to hit them for support. Also note the drop in volume. This indicates there isn't much selling (talking profit) in the current market, so traders are clearly waiting for something.

Finally, as food for thought, consider this 5-year, weekly chart:

Notice the IEFs are in the middle of a 5-year bull run. However, how much lower can rates on the 10 year go realistically?