In my last post, I wrote about consolidations I see occurring
in several markets.
Well, let’s take a look at interest rates (TLT and
IEF, the 20+ years and 7-10 years bonds ETFs, respectively). It will be a very
cursory analysis, as my time remains in short supply.
Here you have the vital chart which spans almost roughly
one year of market action (From the end of April 2013 to April 28, 2014).
Coiled interest rates: Which way they will go? |
The last recorded closing highs were made on May 1st,
2013 (blue arrows on the left side of the chart). Please mind that these highs
were not the highest highs, but merely the highs made on a secondary bullish
reaction against an ongoing primary bear market that started in July 2012 (not
show on the chart). From that point, a new primary bearish swing brought the
both ETFs to new primary bear market lows, and, hence, the primary bear market
(which means higher interests rates) was confirmed. TLT bottomed on 8/21 and
IEF bottomed on 9/05. Since lower lows were confirmed, the primary bear market
was re-confirmed.
From that point (blue rectangles), a feeble (in extent
and in time) secondary reaction set in. It barely managed to retrace ca. 23.60%
(TLT), and ca. 35% (IEF) of the previous primary bear market swing. You can see the retracements shown as horizontal lines. However, in
spite of its feebleness, the movement was confirmed. From that point, the
typical Dow Theory pullback occurred (orange rectangle); it was a very modest
pullback, and it is debatable whether, at least one of these pullbacks, met the
minimum volatility requirements (I did the volatility-adjusted calculations for
my internal use, and in one of the ETFs the minimum volatility requirement,
which is lower than the 3% required for stocks, given the lower daily
volatility of interests rates, was barely met).
More about the volatility adjustments I perform to
determine minimum meaningful movements, here and here.
So, albeit somewhat hesitatingly, both interests
rates ETFs set up for a primary bull market.
As you can see in the charts, the breakup occurred, and we can say that since mid
October 2013 interests a primary bull market was signaled for interest rates.
However, true to the very feeble setup, soon after
being signaled the new primary bull market, both ETFs started to head south.
And here things get interesting. TLT on 12/27/2013
made a lower closing low (that is below the last recorded primary bear market
lows of 8/21/2013), whereas IEF did not deign to confirm. According to the Dow
Theory, such an unconfirmed lower low meant that no primary bear market had
been signaled, and that the primary bull market remained in force. From that
point TLT has staged, until now, a timid rally, while IEF has remained stuck in
a narrow range unable to better the last recorded closing highs of made in
October 2013. Once again, according to the Dow Theory, TLT higher highs, being
unconfirmed by IEF, tell us that the current rally is likely to be deceptive.
So what’s my global take on all that?
1)
Even
though TLT has very modestly rallied, and has even managed to better its last
recorded highs, little progress has made since its 8/21/2013 primary bear
market lows. So, on the chart, I basically see distribution (albeit not as
apparent as in IEF).
2)
IEF
is not confirming TLT’s timid rally, and, hence, confirms that is it very
likely that there is accumulation or distribution.
3)
IEF
itself is clearly caught in a narrow range unable to either break up or down.
4)
So
my global assessment is that interests rates remain caught in no-man’s land,
building up energy.
5)
I
don’t like to make guesses as to the direction of the subsequent break up/down;
however, there is a slight bullish bias, if I am to judge according to the Dow
Theory: The test of the primary bear market lows failed, and the primary trend
is bullish (albeit it was not preceded by the best setup).
Sincerely,
The Dow Theorist
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