Bonds are rapidly approaching a major turning point and investors should pay close attention in the coming weeks. Why? A recent Bank of America survey highlighted the bearish positioning by most institutional managers: a heavy overweight in bonds proxies, such as utilities, consumer staples and REITs, and underweight exposure in equities, notably cyclicals.
My technical work continues to suggest investors are at risk of major reversals developing for which they are not positioned. An upside break-out in equities, supported by a broad-based improvement in cyclicals is taking hold while a downside move in bonds is a risk nearing reality. If they all head for the exits at once, it won’t be pretty.
The iShares 20+ year long bond ETF (TLT), featured below, is widely used as an easily traded bond proxy. Lower price highs are now in place, which is often a precursor to a trend shift. In addition, the TLT is now challenging its 20-week (100-day) moving average which is a reasonable proxy for trend.
I expected TLT will break the 20-week moving average at 138.44, which would be one more data point signaling the TLT’s uptrend is reversing. A break below the September 13th lows at 136.54 (equivalent of 1.90% on the US 10-year note) would confirm the TLT is in a downtrend by establishing the first lower low since the peak in September.
Lastly, weekly relative strength momentum in the bottom panel has been signaling a major turn taking hold after peaking at overbought levels in early September. As a general rule of thumb, momentum indicators generally peak or bottom before a trend reverses, which was the case for the TLT heading into the reversals in 2015 and 2016. A similar negative set up is again in place, which is why the technical levels I mentioned above are likely to be a major trigger point for bond holders in the coming weeks.
My recommendation is to continue to reduce exposure to bonds and their proxies and increase exposure to equities, notably cyclicals given the improving longer-term cycle backdrop.
Noteworthy
Technology leadership remains intact despite the recent pause/pullback in software.
Cyclicals continue to show evidence of bottoming with the financial sector notably outperforming over the past week and on the verge of multi-month price and relative performance break-out. In contrast REITs and utilities are weakening from the upper end of 2H 2019 trading ranges.
Lastly, the discretionary sector is weakening and challenging a key uptrend reversal level. It’s premature to conclude a reversal is in place but we are keeping a close watch on the sector.
