The Market's Measure
Janet Yellen Copyright Chip Somodevilla, Getty Images

Time For A Bond Play? Maybe Not

Momentum hasn’t yet been established.

So, the Fed has spoken. The anticipation and the aftermath of Thursday’s shoe drop has left many investors and pundits reeling. Initially, the Fed’s inaction was a tonic. Then, as Janet Yellen’s words were parsed, Mr. Market took a pratfall.

Long-term investors can view these antics with steely-eyed resolve, but those with shorter investment horizons are understandably worried.

How are you supposed to position yourself in a market like this? Well, at the risk of sounding glib I’d say, “Very carefully.”

If you need to reallocate, at least wait ‘til the odds are in your favor. A lot of technical signals flashed red ahead of the weekend, but a headlong jump into the bond pool may be premature. It’s still filling, cyclically speaking.

Take a look at the month’s price action for the iShares 20+ Year Treasury Bond ETF (NYSE Arca: TLT). The fund has been in a secular downtrend since its January peak above $138. By the start of September, TLT had slipped to $122, though there have been bumps and dips which afforded momentum traders chances to jump aboard – short or long – to ride intermediary trends. On Friday, for example, followers of the fund’s 21-day exponential moving average (EMA) would have likely covered for a four percent gain on their 17-day shorts.

So what should you do?

Bide your time ‘til the Money Find and Relative Strength indices top out if you’re looking for a new short (that is, if you believe in higher rates) or wait even longer for both metrics to bottom if you’d rather be a buyer of bonds. 

 

Click to Enlarge

 

The Money Fund Index (MFI) measures buying and selling pressure and typically oscillates between 80 and 20, on a 0-to-100 scale. An MFI reading of 80 signals an overbought market while a 20 indicates an oversold condition.

The Relative Strength Index (RSI) tracks the speed of price changes and is also measured on a 0-to-100 scale, though overbought and oversold conditions are indicated by readings at 70 and 30, respectively.

The difference between the two? MFI is volume-weighted; RSI is not.

As of Friday, both indices were middling – RSI at 52 and MFI at 46. Not good entry points. 

If you’re itching for a TLT trade, be patient. Let it come to you.

 

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

TAGS: Equities ETFs
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