Tuesday, August 10, 2010

TLT Watch

With a 3.86% yield and yet volatility enough to score an 11% rise within the confines of the three-month chart, iShares 20-Year Treasury Bond Fund (TLT) is certainly not my first choice as a place to park money. It combines the attractions of low yield and a very real risk of wide fluctuations in price.

Yet, TLT is a useful surrogate for the state of the credit markets, and it was fast to react to the Fed's modest efforts to accomodate the very real likelihood that the recovery wasn't quite going according to plan.

TLT $100.09

And despite my dislikes, TLT is home to a significant number of traders (or maybe investors), with volume of more than 6 million shares with an hour an half left in the trading day.

The Federal Open Market Committee, in today's statement, said the Fed would use yield from its mortgage bond portfolio to buy Treasury bonds. The collapse of housing market left the Fed holding $1.25 trillion in mortgage-backed securities and $200 billion more in Fannie Mae and Freddie Mac debt.

So it's a lot of money, and when those Fed dollar come crashing into the government bond market, that increases competition among people who want to buy the debt, raising prices at auction and thereby lowering interest rates.

That, in a nutshell, is why TLT is showing a 1.1% rise (so far ) intraday on volume spike so far running 2-1/2 times yesterdays volume.

The only phase shift among the signals today is on the macd, which modestly peaked above the zero line, but just barely. The parabolic sar remains in bear phase, as it has been since July 28, and Person's Proprietary Signal remains in bull phase, as it has been since Aug. 6. The fast stochastic today zoomed from neutrality to above the 80-line in a bull phase that began Aug. 5.

The move brings TLT up to the level where it was trading in a one-day wonder on July 30, and the price at this point is pulling back sharply from today's peak.

The Fed's announcement was much anticipated as a potential market mover. The announcement was significant, but not really surprising. There was a bit tinkering with the forecast language, and the one dissenting inflation hawk on the FOMC dissented again today.

Longer term, the price rose steadily from Last April through June, and then began to falter.

On the Person's chart, today's sharp rise took the price above the weekly upper pivot, and the price then quickly pulled back to midway between the upper pivot and the midline.

Person's Table
ppspps openupper pivotlower pivot
TLT $100.09 $99.79 aug6 $100.69 $99.04

Today's high is the next level for TLT to challenge if the price continues to rise. It has about 2%+ to go before hitting a major swing high.

Reversal Levels
  • $102.28, +2.2%
  • $101.01, +0.9% (today's high)
  • $100.09 <== You are here.
  • $98.56, -1.5%
Bottom line: I've parked cash in TLT before, for the monthly dividends, but I've ceased the practice because the div is insuffient reward for the volatility. So I watch it as an economic marker, but I don't trade it.

The Great Reflation: How Investors Can Profit From the New World of Money
OK. The credit bubble burst. Housing, burst. Shockwaves reverberated. Markets collapsed. What lies ahead as we reemerge from the wreckage.

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment. No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
  • psar - Parabolic Stop and Reverse
  • adx - Average Directional Index
  • pps - Person's Proprietary Signal
  • ma20 - 20-day moving average
  • macd - Moving Average Convergence-Divergence
  • sto - Fast Stochastic
About the glance: The colors indicate the state of each signal.
  • trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways
  • adx: orange for above 30-up, blue for 20-down, purple for in the middle. Red is most prone to whipsaws
  • psar, pps, macd: green for bull mode, red for bear
  • sto: green for overbought, red for oversold, yellow for the neutral zone.

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