Chart Advisor: Bonds Break Out

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 5th April, 2023

1/ Bonds Break Out

2/ Health Care Stocks for the Win

3/ Will Regional Banks Continue to Fall?

4/ Real Yields Print Fresh Lows

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1/ Bonds Break Out

The 30-year, 10-year, and five-year U.S. Treasury futures are trading above our risk levels, and the major bond ETFs are on the verge of flashing their own buy signals.

Check out the U.S. Treasury Bond ETF (TLT), which posted a potential failed breakdown below the former 2014 lows, followed by a tight, multi-month consolidation. Based on the overwhelming number of breakouts across U.S. Treasurys, the weight of the evidence suggests a higher likelihood of an upside move. 

Source: All Star Charts, with data provided by Optuma

It isn’t necessarily a negative development for stocks and other risk assets if and when TLT takes out that critical level. Rather, the pace of a potential leg higher is what matters.

A rally in Treasurys would likely accompany selling pressure for the major equity indexes. On the other hand, a slow and steady climb in bonds would benefit both bond and stock market investors.

2/ Health Care Stocks for the Win

As we would expect, defensive stock market sectors are enjoying a bid along with U.S. Treasurys.

Health care sits atop of that list. When we search for leaders among that sector we find charts such as Merck (MRK):

Source: All Star Charts, with data provided by Optuma

This pharmaceutical behemoth trudges higher after completing a multi-decade base.

MRK is one of the top-performing names in one of the strongest market sectors, and could be in the early stages of a multi-year uptrend.

3/ Will Regional Banks Continue to Fall?

As money flows into safe haven assets, risk-on areas such as financials suffer and begin to roll over. And no other area of the financial sector has been hit like regional banks.

Check out the breakdown in the SPDR Regional Bank ETF (KRE):

Source: All Star Charts, with data provided by Optuma

The recent selloff is largely due to Silicon Valley Bank’s collapse and the increased risks attributed to smaller banks holding significant unrealized losses in U.S. Treasurys.

Regardless, KRE forms a potential bearish continuation pattern below a plummeting 20-day moving average. These types of continuation patterns have a strong tendency to resolve in the direction of the underlying trend—a trend that is undeniably lower.

But if these banks fail to resolve lower, it would indicate buyers supporting the market in an attempt to repair last month’s damage.

4/ Real Yields Print Fresh Lows

As bonds catch higher across the curve, interest rates are finally starting to break down. This also includes real yields, the nominal yield less the breakeven inflation rate.

Here’s a chart of the five-year real yield sliding to its lowest level since last September:

Source: All Star Charts, with data provided by Optuma

Fresh lows for real rates bode well for long-duration assets, including bonds and growth sectors of the stock market. 

It’s also a positive development for precious metals, as we contend falling real yields could catapult the next leg higher for these shiny rocks. So far, that has been the case this week.

Originally posted 5th April 2023, 2023

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