Actions, Not Words–Or Maybe Both

Last week I mentioned that I would re-visit interest rates in my next post. I am going to suggest that readers re-read (or read for the first time) the first half of my post of December 23, regarding rates and their future direction. (I apologize for the missing charts mentioned in the latter portions of that post, as I now get a message that the images have “an empty alt attribute”, and they have disappeared, even from emailed copies.)

One of the main charts posted then referred to a completed T in the 5 year Treasury that ended November 10. We have now completed the next T in that asset:

As I pointed out on April 10 on elliottwavetrader.net, we also completed a T in the 2 Year Treasury:

The end of a T in rates suggests an end to rising short term rates.

We don’t need to focus on the Federal Reserve, or think about what each new report will mean to their future actions. Price movements on charts are based on a relationship of Bids to Offers, and Price is discovered between the two. The Fed only stipulates short term rates, but there is a relationship between that short term rate and the Bid and Offer for longer term rates. If we see consistency in higher short term rates, those who buy longer term Treasuries to hold through maturity can be comfortable receiving a relatively lower long term rate, This reflects the stability of their principal’s value. However, in an environment marked by inflation, the principal’s depreciation demands a higher interest rate to counteract its value erosion over time. It’s a logical assumption that if the war is being fought strongly on the shorter end of the curve, the longer end will endure less principal depreciation.

Of course, if one is interested in creating substantial returns above those offered by short term Treasuries, it is important to have a point of view on the direction of longer term rates, as these move in a more leveraged manner, based on their duration. Keep in mind that duration is different from maturity. In summary, bond duration is a measure of a bond’s interest rate sensitivity, with higher duration bonds being more sensitive to changes in interest rates.

To put that in perspective, let’s review TLT versus a short term ETF such as SHY. TLT has a duration of 16.5. This means that for every one point change in interest rates, TLT will most likely move about 16 points higher or lower. TLT’s maturity is an average of 26 years. Put that in perspective with the duration of SHY, which has a duration of 1.87. That is also its weighted maturity, oddly enough.

Over the last year, SHY’s total return is 2.18%, while TLT over that same period is lower by 11.8%. The present distribution yield of SHY is 3.21%, while TLT’s yield is 3.68%. Both of these show poor returns versus inflation, and a much worse return than the SPX, with its 28.7% return over that same period (and yet, we hear constantly that equities are at the mercy of the rise and fall of interest rates). Let’s be clear–these are all products of sentiment, as shown by what people are willing to pay for the asset itself irrespective of the relationship of one to the other. And let’s also be aware that the entire movement higher in the SPX of 28% over the last year is equal to its 28% return since the end of October:

When investing or trading an asset, we want to have an “edge” on our side. Over the years, the use of T Theory to forecast future movements on rates has been superior. Having reached the end of T’s in short term rates this week, the 2 and 5 year Treasuries offer promising future returns–both on the interest rate level and the future value of principal. That can’t be said at this time on longer term rates, as there is no T ending at this time.

The following chart uses Terry Laundry’s envelopes for TLT.

While Terry used an Optimum Moving Average of 100, I have found that 50 EMA creates more hits. The above chart shows that we have been unable to breach that moving average. Until we do, TLT is living in a negative environment. Right now that 50 EMA is 94.51.

I mentioned that the GLD T might extend until April 13, offering the chart shown below in last week’s report. We had a sharp reversal yesterday. Daily support is at 212.68.

The hourly middle Keltner resides at 215.47.

There was a huge increase in the discount to NAV on the Sprott Gold Trust yesterday. The Gold and Silver Trust did not show a similar move:

In normal circumstances, an increase in the discount to NAV is usually a positive event, but it needs to be more than a one day wonder. In any event, this may just be a temporary correction within the larger T that should last until January 2025.

As for equities, I pointed out last week that we are building a new T. It’s a painful process, as money leaves the market. We are moving towards that middle Keltner “frog jump” I suggested was coming last week. That support has moved up to 5077.

Unfortunately, the BPSPX has moved below the lower Keltner band, which is not promising. Taken in its traditional context, it is still bullish above a reading of 50. It’s at 60 now, but the lower Keltner is 62. A good bottom would be built if we move below 40 before beginning the next rally. While I show the Keltner version on my site, here is my alternative perspective on this chart:

The Simple Chart is still reading above zero as it continues to fall.

I mentioned last week that we could be creating a Bear T should the VO continue to fall, and to move below -95. The present chart will be revised by Stockcharts on Monday morning. A preview of the correct reading of this can be found on the McOsci, and it has slipped to -77. A reading below -110 on this would also confirm a Bear T. To be sure, we have lost that Complex Structure strength formation.

In addition to Price, we are reaching important support on the Advance/Decline line. Right now, 8090 is an important number to hold.

I am of the opinion that it does hold initially on both Price and the A/D line. I’m not as certain that it will not be a dead cat bounce.

And speaking of cats, the Cat Museum of New York City will be holding its first public event on May 19. Advance purchase is suggested.

https://www.catmuseumnyc.org/events/Secret-Speakeasy-05-24

Please check the charts on the site for updated information, as they are live charts.

Stay Safe