Sentiment Speaks: Can Bonds Rally To New All-Time Highs?

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Includes: TLT
by: Avi Gilburt

Summary

Recent bond action.

Anecdotal and other sentiment indications.

Price pattern sentiment indications and upcoming expectations.

Recent Bond Action

Since the Fed increased rates in December, the bond market has been rallying.

Anecdotal and other sentiment indications

Many have told me that the Fed controls all markets. Many have told me that you cannot fight the Fed. Many have told me that the Fed controls the bond market.

My question is if anyone has told the bond market this?

The Fed has now increased rates 3 times since December of 2016. So, if the Fed truly controls the bond market, and if the Fed truly controls the direction of interest rates in general, doesn't that mean that overall rates should be rising?

Well, the bond market does not think so. Since December of 2016, the bond market has been rallying, as can be seen in the attached chart below of TLT. Yet, the Fed has raised interest rates 3 times during this rally.

Yes, I know the Fed does not set long term rates. But, can we reasonably accept such a divergence between interest rates and Fed action? Or, is it that the Fed really does not control the market to the extent so many believe?

Personally, I do not believe in the omnipotence of the Fed, and I think that the 2020's will likely open many people's eyes to this fact. The reason I say this is because I foresee a major stock market correction which can wipe out 50% of the stock market value in the mid to late 2020's, yet I also believe we will see a continued rise in interest rates, despite the Fed's likely attempt to lower rates to fight the deflationary trend I expect. So, yes, my expectation is for a rising yield deflation years from now. And, that is the environment where many will eventually recognize the lack of control the Fed has on the general markets. Unfortunately, many will not recognize the Fed's lack of omnipotence until it is too late.

Price pattern sentiment indications and upcoming expectations

I view the 128.40 region as resistance in the TLT. As long as the TLT maintains below that resistance level, I believe there is a strong set up to see lower lows in the TLT. However, if the market is able to move strongly through that resistance region, it does open the door to testing the all-time highs in the TLT. For now, my expectation is that the 128.40 region will keep this rally in check.

However, if 128.40 should be strongly broken, then we will likely rally back towards the 137 region. But, again, that is not my expectation at this point in time.

Housekeeping Matter

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Lastly, I will be on vacation for the next few weeks, so I may not be as engaged on Seeking Alpha, as any extra time I have will likely be devoted to my trading room. Also, I will be visiting Israel in the coming weeks and am considering having a get together in Jerusalem and was wondering if anyone will be there who would be interested in joining me for a get together on July 4th?

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TLT over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.