Argus Daily Technical Research: Bond Market Insanity?

Joanna Kong
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We have talked about the insanity in the bond market in recent months, and finally, maybe, we have run out of nitro. Since the rally began on November 2, 2018, TLT (iShares 20+ Year Treasury) has rallied from 112 to 148.60 on August 15. That’s almost 33% in 9.5 months. That may seem like an uncommon move -- but since 2008, a parabolic move in bonds has been seen five times.

The current run has pushed the 14-day RSI to 86, the highest since TLT began trading in 2002. At its recent high, TLT was 9.6% above its 50-day average and over 16% above its 200-day. Since 2002, TLT was more extended from its 50-day and 200-day on the upside two times (once in 2008 during the financial crises and once in the fall of 2011, during the European debt crisis). Today, we have a lot of uncertainty, but we are not in a financial or a debt crisis. Is this the bond market forecasting a recession or has worries about economic risk gone too far?

Since the parabolic move by bonds during the financial crisis, we have seen similar moves four times, including the current asymptotic move. Other times were in 2011/2012, 2014/2015, and in 2016. Each time, these asymptotic moves pushed the 14-week RSI to at least 76, with the current move pushing the RSI to almost 83 or an all-time high. Over the past two weeks, TLT has soared over 7%, exceeded only in 2011 and 2008.

Bond flows into mutual funds and ETFs have been very high almost the entire year, while sentiment has been elevated for much of June and August. This is flat-out panic in the bond market.

Costco Wholesale (COST)

Costco operates 770 stores, averaging 145,000 square feet each, for paying members. About 21% of sales are sundries (including candy, alcohol and tobacco); 35% food; 16% hard-lines (including electronics and appliances); 12% soft-lines (including apparel and jewelry); and 17% other ancillary businesses, including gas stations, pharmacy, optical, hearing aids and printing. Int’l stores represent about 27% of sales and 36% of operating income.

COST broke out of a flat base to all-time highs in early June on higher-than-average volume. The stock then ran up until mid-July, followed by a pullback that has worked off an extreme overbought condition. The shares have been supported by their rising 50-day average during the recent pullback. According to Investors.com, COST has very high Composite, Relative Strength (RS), and Group RS ratings and a high EPS rating. Chart support sits at $262 and we would put a stop-loss just below that area. We would take profits in the $310 region if near-term resistance at $284 is dispatched.

CME Group (CME)

CME Group is a futures and derivatives exchange and clearing company. It operates exchanges such as the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), Commodity Exchange (COMEX) and the Kansas City Board of Trade (KCBT). In addition, CME offers a range of market data and information services.

CME broke out to all-time highs in early June from a large saucer pattern that goes back to Nov. 2018. The stock then traced out a bullish consolidation, working off an extreme overbought condition. For the most part, the price pause found support from the 21-day exponential and 50-day averages. In early August, the shares made another new high on a nice pickup in volume. Since August 9, the stock has paused again, in what could be a bullish flag. According to Investors.com, CME has very high Composite, Relative Strength (RS), and Group RS ratings. We would put a stop-loss just below support at $200. We would take profits in the $235 region if near-term resistance at $218 is broken.

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