Tuesday, July 29, 2014

What If Goldman Sachs Is Right? Charts of TLT, TBT, SJB

The FOMC meets today, and tomorrow it will issue a statement that will be closely scrutinized by the market. Traders are looking for any hints that the Fed will start raising rates, or at least that significant members of the Fed are dissenting from the current easy money policy.

Goldman Sachs has already cast its vote. It put equities on a "hold" last week, fearing that rising bond yields will cause a sell-off in stocks.

As an aside, a hawkish Fed would almost certainly weigh on gold prices in the short term, until and unless people realized that the Fed was worried about inflation, in which case gold would probably go higher again. And there are other forces that can push gold around as well.

Anyway -- back to Goldman Sachs, stocks and bonds.

Goldman Sachs is right in that at some point, bond yields will have to go up and bond prices will have to go down. I don't know if that point is now. Certainly, 20-year-Treasuries, as tracked by the TLT, are in a strong uptrend. Here's a weekly chart ...

(Updated chart)
You can see the TLT made a double-bottom last year and is heading higher. Goldman Sachs seems to think this rally is over.  Are they right?

I can tell you that a simple P&F chart gives a target of 144 on the TLT.  So, you can believe Goldman Sachs, a chart, or your own lying eyes.

But if you DO think Goldman Sachs is right -- that the Fed is going to start raising rates -- then it is likely you think that bond prices will tank, bond yields will go up, and stock prices will step onto the Slip 'n' Slide of Doom as well. At least for a while.

In that case, the obvious thing many traders might do is get some insurance by purchasing the TBT, the INVERSE 20-year Treasury fund ...

(Updated chart)

That looks as bearish as the TLT looks bullish. But again, it's a bet on Goldman Sachs' powers of prognostication.

But let me give you another idea.

Another way to play it would be the SJB, or ProShares Short Junk Bond ETF.

You know junk bonds. The Screaming Mimis, the drama queens of the bond world. If anybody is going to crack under pressure, it's junk bonds. Let's look at a chart of the SJB ...

(Updated chart)

It sure looks like the SJB is testing that downtrend. It looks like it wants to break that downtrend and head higher. Then again, looks can be deceiving, and "every sunken ship has a chart."

I think tomorrow's FOMC meeting could be crucial for the bond funds. 

But we'll see. Good luck and good trades.

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