We Are Still Setting Up For A Strong Rally In Bonds - Are You Ready?

A few weeks ago, I wrote an article entitled “Bonds Setting Up To Skyrocket,” and boy did I get a lot of pushback in the comments section. And, when I see so many who are still very bearish of bonds, it tells me that I am likely on the right track with my expectations for higher in the coming months.

First, I want to revisit how we have dealt with bonds over the last three years. On June 27^th 2016, I wrote an article entitled “Beware of Bonds Blowing Up.” And, that was my first article calling for a top in the bond market. As we now know, within two weeks of that article, the bond market struck a major top which has not been exceeded in almost 3 years. In fact, TLT dropped 22% since it struck its high two weeks after my article.

Then, as we were approaching the end of 2018, I was again warning those who subscribe to my analysis services that bonds were looking like they were finally bottoming, as we approached my major support region noted in my chart. In fact, I noted in our chat room that I was buying TLT when we struck 113, and my initial target for it was in the 124 region before I thought we would see a pullback. And, when the market approached the 124 region, I sold 2/3’s of my position in expectation of a pullback to provide me with price improvement on my positions.

And, on March 1^st, when TLT broke below 119, I noted again my chat room that we are getting close to my first buyback target, and by the end of that day, I bought back another 1/3 position in TLT just below 119 in the TLT.

Since that time, the TLT has rallied strongly off the low struck on March 1. Also since that time, I have seen many publishing articles and posting comments which suggest the exact opposite position I have suggested in the TLT.

Some of those on the opposite side of my trade have cited supply/demand issues, wage pressure issues, and something about lower highs and lower lows. To be honest, I never understand that type of “analysis,” as all it explains is the state of the market right now with an expectation that it will continue in the same trend indefinitely. This is a very linear perspective of markets without any understanding or consideration that markets are non-linear environments. But, I digress.

If you want to know the fundamental reasons behind why bonds will likely head higher, I suggest you read Eric Basmajian’s excellent work on this topic, with whom I am quite honored to work at FATrader:

Bonds Are Saying Something - We Should Be Listening Part II

But, for me, it is a trade based upon market sentiment. The same perspective provided me with advance warning of the top in the bond market back in 2016 (calling the top within two weeks of striking the top), and the same perspective provided me with advance warning of the low we struck in the bond market in late 2018. And, when I said I was going to buy TLT at 113, many thought me to be crazy since the Fed was still raising rates. Yet, I think we can see what won out between market sentiment and the Fed. And, to be honest, it was no contest.

As we move forward, I would have preferred that TLT drop down into another buying target between 116.50-118. However, I am starting to lose “hope” of us reaching that low. In fact, you can probably blame all of those who are on the other side of the trade from us, along with those arguing in the comments section.

You see, when there are too many bears in the market and we have reached a bearish extreme, it keeps a higher price support under the market because there are no longer enough people left to sell. So, if we see a strong move past the 123 region, that would be an initial indication that we will not see my lower secondary buying target, and I will likely have to bite the bullet and add back the remaining amount for a full position.

Moreover, if we do see a more immediate break out, then it would strongly suggest that the minimum target we could see resides in the 131 region, whereas before I thought it would be a minimum target of 128. Alternatively, if we were to see a sustained break of the 115 region, then my expectation would likely be wrong.

So, while it seems that the masses are standing against Eric and I on our near-term expectations for bonds over the coming 3-6 months, at least I know I will be riding this trade in TLT to 131+ in good company.