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Bond Model: Failed Signal?

By: Guy Lerner | Thursday, August 9, 2012

It appears that our bond model will yield a sell signal at the end of this week. I use the word "appears" because my models utilize weekly data, signals are generated at the end of the week. As I have stated on several occasions, the technical picture was looking rather weak despite the positive signal from the bond model. So it seems likely that the fundamental model will be in sync with the technicals by the end of the week. We just need to wait until the end of the week to confirm this.

False signals happen, and that is ok. Nothing is perfect. Fortunately we aren't staying around too long on this trade. The more important question is how this will impact equities? When I highlighted the bond model turning positive on Monday, I stated that such signals usually meant "risk off" for equities over the past 3 years. Equities did poorly when the bond model was positive.

So does this mean a sell signal from the bond model will mean strength in equities? Is it "risk on" again? In this case, I would say, "no". As it turns out, the spike in yields we are seeing this week is occurring while there is strength in the trends in gold and commodities, and this is a strong sell signal for equities as inflationary pressures are heating up. I have discussed these dynamics in great detail in the past.

So to summarize. Our bond model will likely yield a sell signal at the end of the week. In addition, the spike in yields along with strength in gold and commodities is a major headwind for equities.

For the record, figure 1 is a weekly chart of the i-Shares Lehman 20 plus Year Treasury Bond Fund (symbol: TLT). The close below the prior key pivot at 128.52 is a double top, and it is confirmed by a close below the lows of the negative divergence bar (labeled in pink).

Figure 1. TLT/ weekly
TLT Weekly Chart


Author: Guy Lerner

Guy M. Lerner

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