Today's Market WrapUp 12.18.2008 Mon Tue Wed Thu Fri Goldberg Archive
Significant Long Term Bond Market Action
The Bubble Will Pop
BY MARTIN
GOLDBERG, CMT
Rare is the time that a technician can state an event that is a long term sure thing. In my career as a technician-journalist there has been only one such time so far. On February 15th, 2007 with the S&P 500 volatility index at about 10, it was stated, “spreads must always exist and fear cannot go bankrupt.” Indeed fear did not go bankrupt and the volatility index turned bullish before going into an almost 2 year (so far) bull market.
In today’s markets we are likely at a point where there is another “sure thing” in front of us. The sure thing that I speak of is that of the bond market. The chart below of the 10-year US Treasury interest rate from 1960 to the present shows what is going on clearly, in pure and simple technical terms.
The bond market was in a long term (“secular”) bear market (interest rate trend in a bull market, shown) which peaked in a parabolic manner in the early 1980’s. The bull market in bond prices took hold, and this secular trend has been intact for a generation (~27 years). A trend that is 27 years old is difficult to call over or nearly over; especially when it is going as strong as ever in the short term. Yet the reasons are:
- Similar to many long term bull markets, the parabolic move that is now taking place in the bond market probably consists of panic buying of bonds. It is unlikely that the buyers of bonds, whoever they may be, are being smart in their buying. Long term bull markets often end in parabolic moves driven by “dumb money.” After all one must ask, what did these buyers miss in the first 27 years of the bull market in bonds? They probably missed the same thing that February of 2000 Nasdaq buyers missed. They probably missed the same thing that late 1989 buyers of Japanese stocks missed. They probably missed the same thing that 1979 buyers of gold missed. They probably missed the same thing that sellers of bonds missed in 1982. They probably missed the same thing that 1637 Holland tulip buyers missed. They missed the profitable part of long term secular bull markets and now they are buying into the tail end of a bubble climax.
- There is a definite limit to where the bull market can end. It is safe to say that at a 2.19% ten year return, interest rates are near a bottom. They will not go to zero.
Bill Gross says it clearly when he states of short term treasuries:
“Treasuries have some bubble characteristics, certainly the Treasury bill does,” A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return” (my emphasis).
The similar rationale applies to the long term treasury.
There is another relevant aspect of the action in the bond market that is worth discussing briefly. That is the concept of the word “bubble” being used in the media. The tendency is that once bubbles are identified in the media, the bursting tends to take an extended period of time so as to try the wits and patience of those accurate analysts that have identified the bubble using fundamental analysis (while reinforcing those espousing the rationale that “this time it is different”). Remember the length of the discussion as to whether technology stocks were in a bubble? Remember the length of the discussion as to whether the US housing market was a bubble? Remember all the talk of a “new economy” and the demographic-driven housing bull market?
The extended bubble discussion may be at odds with the technical charts which are producing a parabolic thrust downward in interest rates (upward in bond prices). While a parabolic move can go even more parabolic, these parabolic moves tend to be short in relative time duration. Yet one must also consider that the bull market which with we are dealing is 27 years old. Therefore a move of several months can be considered “short duration” in the context of the entire bull market. A look at the 3 year weekly chart (below) of the 10-year Treasury note yield may be revealing. The duration of the parabolic move is a mere 5 weeks compared to the 27 year bull market. However, the sharpness of the drop (from about 3.25% to less than 2.25%) suggests that the move is not sustainable at this rate – especially with a floor at “zero.”
While the reward side of the long trade in bonds is close to zero, the risk is very high.
Today’s Market
Here’s what a near top of a 27 year old bubble looks like – it’s the 30-year US Treasury bond price showing a parabolic move to the upside. So far this week the price is up 4.88%, as it moves parabolic upward. It was up sharply again today. Where is the top?
Where is the top? Here is the same chart in terms of interest rates. Today’s close of 2.546% on the yield is only 2.546% from zero. The top is near in magnitude. This is a sure thing. It’s near in duration, too. But as described above, the top in time terms is tougher to call.
The market was up today on higher volume than yesterday. If there is a sector that will give us a view into the intermediate term, it would probably be the homebuilders. Here is a homebuilder ETF with annotations indicating the technical importance of $12/share. My instincts are telling me that the “V” rally off of the late November lows is an oversold rally. But if $12/share is taken out to the upside, I’d have to tell my instincts to shut up.
Have a great holiday season.
Martin Goldberg
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