The Market's Measure
Odds On Interest Rate Hike Getting Longer?

Odds On Interest Rate Hike Getting Longer?

Charts pointed to a breakout move but did we get one?

Tuesday’s retail sales figures were encouraging to some and disappointing to others. They were just right as pundit fodder. Sales nudged up a rather healthy 0.9 percent in March, the first increase in four months, but still below the one percent gain expected on the Street.

The reaction in the credit markets to the Census Bureau announcement was dramatic. The yield on the long bond dropped nine basis points, to 2.49 percent, before finding a foothold. Shares of the iShares 20+ Year Treasury ETF (NYSE Arca: TLT) gapped up as much as 1.6 percent, or $2, on the news, breaking out of a two-week drift . The move looks like a bounce off the ETF’s 50-day moving average and encouraged technical buying (see the TLT price chart below).

 

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But is this a seminal moment? Are yields set to dip further, pushing TLT’s price towards its February zenith at $138?

Trader consensus certainly seems to weigh in against a near-term rate hike. Based on action in the Fed Funds futures market, expectations for an increase in the benchmark lending rate coming out of the  June FOMC meeting has fallen from 5 percent to 4 percent in the past month.

If you’re a believer in seasonality, you might be inclined to be bullish on TLT now. In each of the past five years, TLT has ended April with gains averaging 3.5 percent. May, too, has been a pretty good month for the long bond fund. TLT’s risen in four of the past five Mays, with a mean pickup of 2.7 percent.  If TLT reacts in line with its average seasonal tendency, a $140 price target might seem reasonable.

(And what of June and the Fed meeting? June’s actually been the worst month on TLT’s calendar. The fund’s only managed one gain in five summer outings, losing an average 0.3 percent).

I’d hold off betting big on TLT based on Tuesday’s spike. Money flow and relative strength are just middling now. Big moves to the upside tend to occur when the fund’s Money Flow Index (MFI) scrapes bottom near 20 and when its Relative Strength Index (RSI) dips toward 30 (see the oscillator chart below).

 

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Waiting for confluence in the indicators seems the smarter wager now. 

 

 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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