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Wednesday, June 5, 2013

TLT H&S top?

In TLT bottom? I showed TLT trying to make a bottom at its 500 SMA.  However, that failed to hold as TLT broke down again.  Here is the weekly chart.

This chart has a bit of a head and shoulder top look to it.  The neckline is slanted up so it is not exactly textbook.  However, TLT appears to have broken down below the neckline.  This pattern has been forming for almost two years now.  If it turns out to be a real top it could support a sizable move down in TLT and up in interest rates.  Lets zoom in to the daily chart.

TLT broke down below its 500 SMA on heavy volume.  The stock market selling off lately has not helped it yet.  It is not clear to me exactly why bonds are selling off.  It does not appear to be a rotation into stocks.  It also does not appear to be inflation.  We have seen the break down in gold.  Here is a chart with a couple of inflation measures on it.

Both the PCE and the CPI have been heading lower for months.  It is hard to see how inflation expectations would be increasing with data like that.  Without a clear picture of why TLT is breaking down it is a bit hard to say for sure if this will end up being a big top.  Rising rates would clearly not be good for the economy and not what QE was expected to do.  There has been a lot of tapering talk lately from the FED.  From what I can see it is not happening because the economy is taking off.  The economic data just does not support that.  Could it be that the rise in interest rates is worrying the FED?

This could always be a false break down in TLT that ends up being an important bottom.  However, there is no sign of that yet.  If it is for real and rates rise significantly there could be lots of consequences.  I think the rise in rates has hurt the utility stocks and other dividend payers some already.  I read the other day the 10 year yield is now above the dividend yield of SPX.  One of the bull cases for stocks has been low rates.  What happens if that starts to go away without an improving economy?  I think this is something that we need to keep an eye on.


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