Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
Only in the financial markets can prices fall in the face of massive official buying. Despite breaking the major rule of economics, that's what seems to be happening as the Federal Reserve buys up $600 billion worth of Treasury securities.
Falling bond prices mean rising interest rates. For the benchmark 10-year Treasury, a 4.00% level—which has been a solid ceiling the last two years—remains within hailing distance of its current 3.44%. And the latter level is a full 100 basis points above October's low, touched in anticipation of the Fed's buying.
Using the iShares Trust Barclays 7-10 Year Treasury Bond exchange-traded fund (ticker: IEF) as a proxy, the 10-year note is currently in a small pause (see Chart 1). Chart watchers might label the pattern as a triangle or pennant due to its shape, but no matter the name it usually points to a continuation of the trend in force. That trend is down.
7-10 Year Treasury ETF
If the pattern is broken to the downside, there is a major support level in the 89-90 area, which looks to be an enticing target. This level brought out buyers en masse on several occasions in 2009 and 2010; under technical-analysis assumptions, it should do the same in the future.
But that level would also mark a major crossroads in that it roughly aligns with a 16-year trendline drawn on the chart of the 10-year Treasury note itself. Since the ETF did not exist back then, we can only extrapolate the specific level for its long-term trendline.
If and when the ETF falls to 89 or below, then we'd have to consider the market to be in a confirmed long-term bear state. Personally, I think we have seen the price peak and that there is a short-term bear market already in place. However, according to technical rules, we cannot declare a long-term bear until the prior bull market's trendline is officially broken to the downside. That line is also in the 89-90 area today.
(Similarly, Louise Yamada, the doyenne of technical analysts, says that a breach of the 5.50% yield level, either by the 10-year note or the 30-year bond, would confirm the beginning of a secular bear market. At 4.52%, the long bond is still about 100 basis points away from that crucial point. See Up and Down Wall Street, "Bond Market Surprise for 2011?," Jan. 4, 2011.)
High-grade corporate bonds normally track the activity in the Treasury market. In times of severe financial distress such as 2008, however, the two part ways. Investors flock to the presumed safety of Treasuries and the charts of the two look very different (see Chart 2).
Investment Grade Corporate Bond ETF
But iShares iBoxx $ InvesTop Investment Grade Corporate Bond Fund (LQD) also tumbled over the past few weeks, and similar to Treasuries it has formed a short-term pause. Unlike Treasuries, however, that pause took place at an important support level at 107.50, which can be traced all the way back to 2006—before the financial crisis unfolded.
Given the shape of the pattern and lack of contrary evidence in momentum indicators, the odds favor the continuation of the current declining trend. That would put the next downside target in the 103.25 area—again, a level that can be traced back to 2006.
Municipal bonds also typically track other types of bonds in normal times and, until recently, the iShares S&P National AMT-Free Municipal Bond Fund (MUB) looked very much like the corporate bond chart (see Chart 3).
Municipal Bond ETF
Last October, munis were under fire as talk of a state and local financial crisis was everywhere. In addition, the sunset of the Build America Bond program at the end of 2010 threatens to boost supplies of traditional tax-exempt bonds in the new year. The price plunge in MUB nearly qualified as a crash, although from its June 2010 peak to December 2010 low, the net change was less than 10%. But for the bond markets, this is a huge move and the extreme volatility that resulted makes finding reliable support and resistance levels very difficult.
For now, it seems as if this market needs to rest. But if Treasury bond prices continue to fall, the downward pressure on municipals would remain high.
For bonds in general, the short-term price trend remains down. Respective major supports are still below current trading and that means bond bears still have the upper hand. Fixed-income investors will have to wait to see if those supports are broken to see if a long-term, secular bear market is beginning.
Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
After a 10% run-up in the bank's stock, valuation is less attractive.
Daniel B. Hurwitz sold 163,000 shares after a 53% gain in 2010.
Even with today's share-price drop, the discount retailer still appears to be richly valued.
Legg Mason and Franklin Resources could feel the pain.
The chip maker is set for healthy returns.
Credit Suisse likes PNC Financial, U.S. Bancorp and Wells Fargo.
The consumer-goods firm will see lower earnings on lower margins.
Strong production growth and promising reserves bode well for shares of Whiting Petroleum and Continental Resources.
As the storied company splits in two, the cellphone unit has more upside.
The Consumer Electronics Show will see iPads and the like dominating.
The retailer could see 30% year-over-year revenue growth.
Dow Chemical, Celanese and Rockwood are good values, says Credit Suisse.
Fund veteran Susan Byrne picks her favorites among cash-rich companies with growing dividends.
The tech-security firm will expand beyond small and medium enterprises.
If forecasts for dividend hikes pan out, these shares could rise. (At SmartMoney.com.)
It's time to renew auld acquaintance with underpriced big-caps such as ExxonMobil, Pfizer, Wal-Mart, PepsiCo and GM.
That's what a first-rate technician sees coming, and soon. A parting bow to 2010.
Read Full Article »