I get it, most people think that bonds are boring. And for the most part, they’re right…
Until they’re not, which is the time to listen.
During the 2007-08 financial crisis, some of the most exciting trades came from the bond market.
The reasons?
First, the bond market is larger than the stock market.
Second, the bond market is primarily made up of institutional money, not retail.
Third, because of that institutional aspect, bond traders take a much longer view of the market forecast than stock traders.
Want to see it at work?
In 2021, we saw a rollover in the bond market begin in July, six months ahead of the S&P 500’s top. Just one month ahead of the stock market’s failure, the bond market started its precipitous drop.
For those watching, those two moves tipped the stock market’s hand that the bear market was inevitable.
Today, we’re facing a mirror image as bonds are once again revving-up for a bull market move.
In October, just ahead of stocks, shares of the iShares 20 Plus Year Treasury Bond ETF (TLT) formed a technical bottom as the first signs of buying strength formed a trend.
Shortly after that, names like Bill Gross and Jeffrey Gundlach – two titans in the bond market – took to the airwaves to announce the death of the bond market bear.
It takes a lot for these guys to put their name on the line, and frankly, I called shenanigans on them at the time - but they may have made the type of call that defines your legacy.
But the fight isn’t over, and the next 5% move in the TLT is going to be the most important.
Here’s why…
Check out the chart below. Tuesday’s closing price for the TLT lands it a mere 5% away from moving above two critical technical levels.
First, the $100 price level.
Markets love round numbers and the more zeros, the better. They’re considered heavy psychological “triggers.”
TLT shares moved below the $100 price in July 2023 and didn’t look back as the shares tumbled 19% in just two months.
A move above the $100 is likely to draw buyers back into the bond market, especially on the heels of the bond “titans” mentioned above.
Next, a move above $100 will signal a break above the TLT’s 20-month moving average.
This is an important technical trendline that is often watched by the market and trading algorithms.
Why?
The 20-month moving average is used as the technical line of demarcation between bull and bear market trends.
That’s right, a move above the $100 level puts the bond market into a bull market trend for the first time since December of 2021.
This tectonic shift in the bond market, should it happen, will trigger another wave of buying power into the stock market that could start 2024 out on the best footing it’s had in years.
Here’s how we turn this trend shift into profits…
Obviously, I’ve started adding TLT shares to my portfolio. Last week, I was following the resurgence of the 60/40 portfolio. The last bull market breakout led to a 55% return for TLT shares in only 16 months.
More aggressive traders may want to consider the ProShares Ultra 20+ Year Treasury (UBT). This ETF offers a tool for investors to leverage moves in the bond.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.