an tSionna {01.19.12} Bonds-A Topping Pattern?

This is a chart of the iShares 20 year + treasury ETF {TLT}.  I put this up because it comprises a treasury portfolio of the longest dated bonds an investor could hold.  You can see that back in the summer the price of TLT exploded to the upside as investors fled from risk assets into the perceived safety of US Government bonds.  Interesting isn't it that investors went here to hide even as S&P downgraded US debt in the fall!

Since then though TLT has spent all this time going nowhere.  In fact it's chart characteristics and money flow data are strongly suggestive of a security in a topping pattern.  That is it is trading in a manner where there is a higher probability that its next move will likely be a decline.  Year to date it has now fallen a little over 1.5% while stocks on average are up 3%.  

Intuitively this makes sense simply given how low yields are and how much money {read trillions of dollars} have moved into perceived safer assets.  Some German Bunds for example currently have a negative yield.  The current yield on 30 year treasuries is just a bit over 3%.  I've stated this before but here is what a low yield like that means.  Investors are so worried about economic growth and how it will affect their capital that they are willing to take a rate of return over the next 30 years that on an after tax basis and when adjusted for inflation will likely give a negative return.  Meanwhile there are many good quality stocks and ETFs that yield as much as the 30 year treasury or even more. 

So far stocks have had a pretty good January.  What we may finally be seeing is a shift in asset allocation into more riskier assets.  That is a move away from bonds and into stocks.  It's early in the game but if this is starting to occur and especially if the economy truly is on the mend then expect to see interest rates start to rise this year.  If that is the case then this security is vulnerable to a correction.

*Long TBT- the Proshares Ultrashort 20+ year treasury ETF in certain client and personal accounts.