Seasonal MACD Update & Seasonal Sector Trades: 30-year Bond By: Jeffrey A. Hirsch & Christopher Mistal | April 11, 2019 | Email | Print

Seasonal MACD Update

 

As of the today’s close, the slower moving MACD “Sell” indicators (at bottom of following charts) applied to DJIA and S&P 500 are positive but trending lower (blue arrow points out shrinking difference between the two lines). Currently, DJIA needs to gain a little more than 0.3% to avoid turning its MACD indicator negative. S&P 500 would need to decline nearly 0.5% to turn its MACD indicator negative. In addition to struggling with resistance just below old all-time highs, DJIA and S&P 500 appear to be constrained by projected monthly resistance (red dashed line in upper panes of both charts) over the past several trading sessions. 

 

Economic data remains somewhat mixed with pockets of strength in some areas, such as the labor market, and weakness in others. Most notably slowing growth. Q1 earnings reports are likely to be the next catalyst that could move markets. Expectations are low, perhaps too low. However, what is likely to be of even greater importance will be guidance issued along with Q1 earnings reports. If companies signal that Q1 was just a soft patch, then the market is likely to respond favorably and continue its assault on old all-time highs. If guidance and earnings both disappoint then the opposite is more likely.

 

 

Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.” We will issue our Seasonal MACD Sell signal when corresponding MACD Sell indicators applied to DJIA and S&P 500 both crossover and issue a new sell signal.

 

 

The long bond tends to bottom sometime during Q2, typically around the time the stock market reaches its highs, and then enjoys a solid run of strength into Q3 and beyond in some years. Note seasonal strength shaded in yellow in chart below.  Bonds are also a relatively safe place to park capital during the “Worst Six Months” of the year, May through October.

 

 

When investors and/or traders feel threatened with a potential decline in the stock market, they often allocate more money into bonds. This is often referred to as the “flight to safety” trade. Investors and traders will also allocate more money to bonds when they believe the yield is more attractive than other shorter-term investment options. 

 

By going long, the September 30-year Treasury bond on or about April 25, and exiting the position on or about August 20, we discovered in the last 41 years a respectable 70.7% success rate. This trade has a history of 29 wins with 12 losses; the largest win was $20,250 in 2011, and the largest loss was $17,031 in 2013. The trade’s track record over the last 30 years (shaded in grey in table below) is even better with 23 gains and a success rate of 76.7%. Even last year when the market was rising, and the Fed was tightening, the 30-year bond enjoyed a modest rally.

 

Now that the Fed has signaled it is holding off on rate hikes (and is most likely done with the current tightening cycle) this trade could perform better than historical averages. Two key reason why are; first the Fed did not officially announce they are done raising rates which suggest there could still be traders and investors looking for even higher rates (and correspondingly lower prices). Should the Fed make it official there could still be additional demand that jumps into the market. The second reason for more gains is the fact that our 30-year bond yield remains rather attractive to foreign buyers. Our 30-year Treasury bond yielding just under 3.0% does compare quite favorable to Germany’s 0.63% or Japan’s 0.51%. Growth and inflation expectations also remain subdued which could make a nearly 3% yield all that more appealing.

 

 

Stock traders may consider the exchange-traded fund, iShares 20+ Year Bond (TLT), as a replacement for the futures contract. TLT has a little more than $10.6 billion in assets, typically trades more than 7 million shares per day and has a reasonably deep and liquid options chain available. TLT’s expense ratio of just 0.15% is very reasonable and its most recent distribution yield was respectable at 2.64%. 

 

 

Stochastic, MACD and relative strength indicators applied to TLT are tepid and heading lower as its price has slipped from recent highs and into a narrow range over the last several trading sessions. TLT would be attractive on dips below $123.55. Consider adding a half position in TLT now. If TLT trades below this buy limit, before we issue our MACD Seasonal Sell Alert, a half position in TLT will be added to the Almanac Investor Tactical Seasonal Switching ETF Portfolio. Alternatively, TLT trade execution could be postponed until when we issue our MACD Seasonal Sell Signal Alert for DJIA and S&P 500.