Guest Post by Tom McClellan
September 05, 2014
One interesting piece of analysis we have featured recently in both our Daily Edition and our twice monthly McClellan Market Report newsletter involves total open interest in T-Bond futures. There are four contract expirations per year, in March, June, September, and December, and total open interest tends to see a peak late in the month preceding each quarterly expiration.
This market is so interesting. I feel like just putting up chart after chart and letting you come to your own conclusions rather than always being so wordy about everything. Here, take in the message of one of the most speculative excesses bred by the Fed’s policy (lust for junk bonds, top panel) and junk’s relationship to what is thought of by the masses as a safe alternative. Let the picture tell its story…
I sold all of my longer term Treasury bonds at the first level of support in anticipation of this bounce in yields. The bonds had returned some good principle gains along with a month or two of dividends. I am wondering now if the bounce in yields is finishing up and maybe the bonds might be favorable again.
The following is one of a wide range of analytical topics covered in NFTRH 293’s 35 pages this week, much of which is straight ahead technical analysis. But the T Bond market is usually central to an overall macro view at any given time. This segment is not meant to provide actionable direction (other than perhaps to prepare for a potential rise in T bonds yields), it is meant to dig into the mechanics beneath the financial markets in an effort to have people consider that there is much more going on with markets than simple nominal TA or conventional fundamental analysis (PE ratios, growth metrics, reported economic data, etc.) can account for.
US Treasury Bonds
10 & 30yr yields have declined to support as NFTRH projected
Yields on long-term Treasuries have continued to decline in line with our view that was contrary the ‘Great Rotation’ (out of bonds) hype. The [30-year] especially is now close to support and the next play seems like it could be rising yields and declining T bonds.
Our long-term ‘Continuum’ chart; yields approach support
The 30-year ‘Continuum’ view above makes the simple case that players had to be put offside believing in the ‘Great Rotation’ at 4% yields. The nearly half-year decline since then has now satisfied the chart as yields have come to our 3.1% to 3.2% target range, where there is support.
The first in what I think will be a line of reports that focuses in on themes for deep summer, as da boyz relax, cashed out and sipping specialty cocktails at sunset in da Hamptins. NFTRH 293 is 35 pages of pure focus on US and global stocks, precious metals and the all important Treasury bonds / interest rate markets.
You did not hear about the red dotted line (AKA the monthly EMA 100 ‘limiter’) on the ‘Continuum’ anywhere else at the height of the Great
Rotation Promotion. Just here; though I recall Jeff Gundlach remaining firm on T bonds in the face of the hype. Now the herds pile into T bonds as risk starts going ‘OFF’ (as so many indicators have hinted could happen).
30 year yield (AKA the ‘Continuum’) from NFTRH 281
Ah, but there is a support level we have had on radar since the yield topped out. I already sold TLT (20+ year bonds) and will probably do the same with IEF (7-10 year) shortly, keeping bonds in the 0-3 year range (come on Janet, end ZIRP). TLT is getting over bought and the momo herd is in motion running from stock market risk into T bonds. Unsavory characters they are, with little moral compass and even less common sense.
Also at some point, another risk ‘OFF’ asset is probably going to find support, bottom out and lead a coming phase. We’ve got a 2014 Macro Pivot theme in play after all. First the gold bug leaders have to finish getting debunked and strung up by the true believers.
Among its 29 pages of high quality market analysis, this week’s NFTRH (#287) reviewed the Commitments of Traders (CoT) structures of a few markets and their implications.
The above CoT graph clearly shows that gold has declined as the structure improved (red arrows). It then bottoms with the circled extremes and rises in conjunction with a degrading structure (green arrows). Gold is still on its journey toward bottoming.
The 10 vs. 2 is, you guessed it, unfavorable for gold once again as it has been for a week now. The declining spread (2’s up harder than 10’s) indicates that risk is coming back ‘ON’ in the markets as people dump their liquidity safe havens in the 1-3 year realm.*
The good news for gold – should risk go ‘off’ again – is that it is no longer part of the ‘all one market’ syndrome. It’s a risk ‘OFF’ item, which is what it should be. Tune out the myriad rationalizations by conspiracy detectives and realize that gold is going nowhere until a counter cycle is indicated.
Think about the year long topping process of up and down spikes on the HUI Gold Bugs index in 2011. Now think about things that may be working on replicas of that activity (hello US stocks) and things in the mirror that may be working on the inverse of it (hello grinding and dispiriting gold sector).
Now think about how long these processes take to play out and the patience involved. Also think about trading or defaulting to cash, because at times of change the volatility is something to behold (going both ways).
NFTRH 286 out now.
The spread between 10’s and 2’s is widening again today and that is good for gold and not so good for the stuff most people cheer for, like the stock market and US economy. Again, I remind you that no one day should be taken in a vacuum, but this is now two days in a row of Yield curve strength strung together.
This is no comment on anything other than the spreads, which as they stand now are not in a gold bullish alignment. Sorry, but that is what the charts are doing at 3:07 ET on a Friday afternoon. What they do from this moment on is anybody’s guess.