After a 60% rally from its 2018 lows, I think a cycle peak is in for the TLT Bond ETF. This ETF, which is one of the most widely owned bond proxies, is showing technical evidence of establishing a cycle top. And as usual, history provides us some valuable insight.
Take a look at long-term momentum oscillator in the top panel of the chart below. This is a useful technical tool that signals longer-term trend shifts in markets. Similar to peaks in Q4 2016, Q1 2015, Q3 2012 and Q2 2009, it is in the early stages of turning down from overbought levels. I think this is a signal that bonds have established their highs for this cycle and a is call for investors to reduce exposure.
Interestingly, in addition to the TLT’s monthly momentum signaling a cycle peak, its price is showing evidence of peaking at the upper of range the +2 standard deviation band of its 2008-2020 price uptrend. As demonstrated below, this +2 standard deviation band has served as reasonable caution zone for bonds at prior cycle peaks since 2008. I think it will continue be for this cycle as well.
Bottom line: The TLT bond ETF is exhibiting the type of technical behavior that often develops at a cycle high and I think it is time to reduce bond exposure. I recommend investors redeploy those funds into the equity market.
Where could I be wrong? Risk assets are often weak during September and October, and with election uncertainty and back to school COVID worries on the rise, a rotation from risk assets could easily develop.
However, while some volatility in risk assets would not be a surprise in late Q3/early Q4, I recommend using strength in bonds to reduce exposure and accumulate weakness in equities.
Figure: Weekly Sector Review
Source: Fundstrat, FactSet
Figure: Best and worst performance sectors over past 3 months
