Bonds Rally…Not Everyone is Surprised

In 2015 there was a great deal of “fear and loathing” related to the bond market.  With speculation rampant that the Fed would “finally” raise interest rates, there seemed to be a growing sense of inevitability that the 30-year bull market in bonds was about to end.
And perhaps it will.  But as it turns out, it looks like bonds may not go down without a fight.
Figure 1 – Bonds breaking out of a narrowing channel (Courtesy ProfitSource by HUBB)
Figure 2 – Weekly Elliott Wave count still suggesting a potential bull move for bonds (Courtesy ProfitSource by HUBB)
Likewise in this article I discussed the fact that the U.S. treasury bond market typically trades inversely to the Japanese stock market.  Figure 3 displays the performance of t-bond futures (a 1-point move in t-bond futures = $1,000) since 12/31/97 when ticker EWJ (an ETF that tracks the Japanese stock market) is:
*In a downtrend (i.e., the 5-week moving average is below the 30-week moving average), which is bullish for t-bonds (red line)
*In an uptrend (i.e., the 5-week moving average is above the 30-week moving average), which is bearish for t-bonds (blue line)
Figure 3 – T-bond performance when EWJ indicator is bullish for bonds (red line) versus bearish for bonds (blue line) 12/31/1997-Present
Although the bull and bear track record is far from perfect, the point is that there is clearly a difference in performance between the two.  As you can see in Figure 4, EWJ remains in a firm downtrend (note at far right of bottom clip that 5-week MA is well below 30-week MA), which i.e., is theoretically bullish for bonds.
Figure 4 – Ticker TLT with buy signals from ticker EWJ (Courtesy AIQ TradingExpert Pro)
Will bonds continue to rally?  It beats me.  Still the “Risk a few bucks on the chance that bonds surprise the heck out of everyone and rally like crazy” trade that I highlighted in the article is now showing a profit of 55% and is poised for huge gains if by chance this rally somehow continues. 5
Figure 5 – OTM Directional Butterfly Spread using options on TLT  (Courtesy
Which is entirely the point of the “Risk a few bucks on the chance that [chosen market/stock/ETF/index here] surprise the heck out of everyone and rally like crazy” trade.
One caveat: As is always the case in the markets, you can see whatever you wan to see in any situation.  While most of what I have showed so far is “bullish” for bonds, still TLT is a bit “overextended” at the moment and is in a key resistance range as you can see in Figure 6.6 Figure 6 – TLT up against resistance? (Courtesy AIQ TradingExpert Pro)
I am not telling you to be bullish on t-bonds.  Nor am I telling you that the recent rally in bonds is about to peter out.
I am telling you that when “Everybody Knows” that bonds [or whatever] can’t possibly advance in the face of the Fed raising rates [or whatever]……there is a good chance that “Everybody Knows Nothing.”
Jay Kaeppel
Chief Market Analyst at and AIQ TradingExpert Pro ( client

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