5/08/2017 Possible Trouble in the Long Dated Treasury Market

Dear 401(k) Participants,

We are very much concerned about long dated treasuries and bonds in general.  Those markets have far broader implications.

As you know, we’ve advocated that participants consider hedging their bond portfolios with the Inverse Long Dated Treasury fund.  We’ve also suggested taking profits on that hedging strategy pending completion of a counter-trend rally.

We wanted to put you on alert that we see some very bearish (indicating the probability of lower bond prices and higher interest rates generally) action in the long dated treasury markets.  OnJuly the 8th of last year that market put in a top.  We monitor this market with the Spiders BBG Barclays Long Term Treasury ETF, ticker symbol: TLO.  TLO peaked on that day at $82.40.  Then it fell dramatically in 5 down/up waves that were very much impulsive (indicating a new trend from up to down) culminating in an interim low on March 14th of this year of $67.50.  That was a loss in principal of 18% in what many regard as the safest investment, a US Treasury Bond.

Since then this market has completed what could be a short correction that so far has peaked at $72.16.  We anticipated the new counter-trend rally would bring that security up to the $73 range in the vicinity of the common 38.2% Fibonacci retracement level (the least expected retracement level) and the 200 day moving average.  We are hopeful it will still do so. There is also an open chart gap created by the waterfall decline between the November 8th low of $74.75 and theNovember 9th high of $73.46 which corresponds to the 50% Fibonacci retracement level. 

However,  today, we closed below the 50 day moving average ($69.81; which is also below all other moving averages that we view as relevant; also bearish) by closing at $69.71.  This is bearish and calls into question whether we can expect a larger rally into the above cited areas.  Until today, we fully expected a longer rally in both terms of time and price, since thus far both have been quite anemic.  So, this could well be a fake-out and we might very well see the rally continue into the cited areas.  However, given the fact that that market has closed below all relevant moving averages, since the major trend appears to be in down mode, and there is negative relative strength, that market is in serious jeopardy.  Also, if we are going into now what would be a 3rd wave down, it could be one for the record books.  So the gravity of risk to us is also high.

Therefore, we encourage everyone to consider hedging any of their bond portfolio positions, whether that be directly held or as a part of a target date allocation fund.  It may be appropriate to hold 2% of your funds in the inverse long dated treasury strategy fund for every 6% to 10% held in bond funds generally.

If we regain the averages, we’ll do our best to notify you of the “fake-out” and remind you about the idea of re-hedging if and when this market reaches more usual retracement levels.

Since the 2009 lows, treasuries have led stocks up.  However, even though the bond market now appears to us to be in a bear market, stocks have ignored the change of direction in bonds so far.  In our view, this is creating a major intermarket divergence that should not be ignored.  If this turns into a bond rout, we doubt stocks will hold up. 

So, again, it might be a good idea to have some substantial cash on the sidelines and to partially hedge your long stock positons with inverse stock funds, like maybe 1% inverse to every 3% or 5% in stocks.  We do not advocate an extremely high cash position or overly hedged stock position unless and until we put a blow-off top cap on the bull market that has raged on nearly unabated since the March 2009 lows.  Action in the NASDAQ and technology shares suggest to us that a blow off top is still a real possibility.

Gold and silver mining shares are oversold, but we are not ready to call a low in those shares just yet.  However, it may not be a bad idea to begin accumulating small positions in your gold fund as a low could follow in the not too distant future, if one is not in yet.   If gold itself were as oversold as the mining shares, we’d likely be more bullish on that market. 

We’ll update you on emerging markets soon.

Another market primed to take profits in, in our view, is in international stocks. They are overbought and over-loved on the back of the French elections and today it looks like those markets are now selling the fact after having bought the rumor with both hands.

We hope this helps.

We remain, very truly yours   .   .   .

DISCLAIMER: 

This is a Market Alert and Potential Investment Opportunity notice.  It does NOT constitute investment advice, which can only be provided in the context of full knowledge of an individual client's financial position and goals.  Hence, this notice, and all such notices (whether or not this disclaimer is provided) should be considered by the participant in connection with advice from their own investment advisors.

Our obligation to the plan is to maintain sufficient investment options so that participants can manage risk and capitalize on opportunities.  This free notice service is beyond our contractual duties to the plan and is provided as a supplemental service which participants are free to accept or reject. 

Thank you for your attention to this notice.  We greatly appreciate your trust and confidence in us and wish you and all of the participants the best in achieving your retirement objectives.