Everyone Hates Bonds…. Should You? BY ANDREW THRASHER
There’s little doubt in my mind that going into 2013 one of the most hated asset classes was bonds. With the report from Lipper of massive inflows into equity mutual fund, the largest amount since March 2000, nearly every major Wall Street strategist turning into a bond bear and the likely lack of interest rate activity it’s easy to understand why people have turned sour on bonds. However we have had low interest rates for over four years with the only option for rates to rise, bonds still have performed handsomely. It’s been over 30 years that this current bond bull market has maintained its legs, and various indicators are giving mixed signals for whether or not its run can continue to run.
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There are numerous ways for us to evaluate momentum on a chart. The most popular, and my preferred method, is using the Relative Strength Index (RSI). The most common way to use the RSI is looking for overbought and oversold levels, most commonly at breaks over 70 and under 30. But there is still much that can be gleaned from the action between these two levels. When RSI is repeatedly unable to get to the 70 level when price is advancing it can serve as a warning sign that something might be changing in the character of the price action. Constance Brown wrote in Technical Analysis for the Trading Professional that when a security is in a bull market the RSI will often stay between 90 and 40, a sign that bear are unable to force momentum into a traditional oversold condition. During bear markets, RSI will fluctuate between 10 and 60 as bulls can’t grow their consensus to get momentum to 70. In November the 10-year Treasury’s RSI indicator hit a top at 65 and since then has been unable to break above 50. This ‘momentum bear channel’ that bonds seem to be in could last for weeks or months, in my view it’s preferable to let price lead and dictate our action.
In the bull case for bonds we have Commitment of Traders data giving us a notion that small trades are big fans of the short bond trade. Looking at the weekly COT chart of the 10-year (not shown) we can learn that small traders (often called the ‘dumb money’) is more net short than they were at the short-term bottom in bonds in March ’12 and have taken their net position to the lows last seen in April ’12 – when bond prices hit a low. When looking at COT data we often focus on what the commercial or ‘smart money’ is doing, but just as much can be learned from small traders as they are often wrong when their positions begin to grow as large as they currently are. We’ll see if this time is any different.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
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About the Author
Andrew Thrasher is an Investment Analyst with The Financial Enhancement Group, a central Indiana-based money management firm. He specializes in technical analysis, focusing on intermarket, mean reversion, and trend analysis based on varying timeframes.
He currently holds the Accredited Wealth Management Advisor and Accredited Asset Management Specialist designations. Andrew is a level three candidate for the Chartered Market Technician® and is a member of the Market Technician Association. He also holds a Series 65 securities license and is registered with World Equity Group. You can learn more at http://www.athrasher.com and follow him on Twitter at @andrewthrasher.
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