The first quarter will go down as one of the better in history and there will be plenty of stats and feel good comments spread around. But, as the saying on Wall Street goes, “what are you going to do for me now?” Money is ever looking forward and wanting to accomplish more. Today our focus is some developing trends that are worthy of our attention looking forward.
One trend that has my attention is treasury bonds. The chart below of TLT, iShares 20+ Year Treasury Bond ETF shows the move higher in value of the bond as interest rates effectively moved from 4.3% to a low of 2.7%. The rally in the bond made it one of the top performing assets in 2011. In the first quarter of 2012 it has effectively traded sideways to down. In the last two to three weeks the question has begged why has the bond not fallen further or rates risen higher if the economy is good enough to spark a 10% rally in stocks? In fact, the chart shows the bond price moving higher again over the last two weeks. The simple answer is the Federal Reserves willingness to step in and buy nearly 700 billion dollars worth of bonds. The Fed wants to keep rates low to help both the economy and the housing market. With the Fed pretty much done buying bonds under the quantitative easing program will rates rise. The last two weeks that has not been true. Fear of slowing economic data has pushed investors back towards the bond for safety. Some risk is being taken out of portfolios. Will that continue or do rates rise the balance of 2012? That is the trend to watch. Resistance on the current bounce in TLT is $115.30. A break through that level would be positive short term for the bond, but the longer term outlook for the bond is on the downside. A target of $105.75 is the consensus for the ETF. Thus, we are watching to see if that trend develops off the current bounce.
Financials have been a leading sector in 2012. As seen in the chart below the trend to the upside has been well established and accelerated nicely to the upside. Does it continue from here? My answer is yes, but as you know what you believe has to be validated from a view of healthy skepticism. The resistance near $16 is in play. The pullback or test is what to watch near term. If we hold this level and move back towards the target at $17.20 we are happy and willing to accept the profit. If however, our belief or analysis is wrong we have stops in place at $15.35 to take us out of the position. The uptrend off the October low is the longer term trend line we continue to watch. It is evident from looking at the chart that we have accelerated off the trend line and leave plenty of room for consolidation. Watch the parts for clues on how this will play out short term. KBE, KRE, KIE and IAI are four ETFs to track the subsectors of financials for insight to how it is doing in the trenches so to speak.
Commodities have been a mixed bag of nuts. The chart below shows the trend to the upside starting off the December lows, but the peak hit in February has reversed and started lower establishing a short term downtrending channel. The test of support on Thursday at $28.50 on DBC, PowerShares Commodity Index Tracking ETF caught our attention. There was spike in volume on the selling as well. Crude oil was leading the sector higher along with a resurgance in gold prices. The shift in both commodities to the downside of late has put more pressure on the sector overall. There are mixed opinions on whether this is a good sign for the economy overall or a bad sign. The simple view would be to believe that supply and demand will drive the prices of commodities. If the economy is doing well consumption would rise. Our focus is not so much the economic implications to the price of commodities, but whether or not we should own them in our portfolio. For now the charts say no. In fact, if the downside continues or accelerates we should look at being short the sector. For now we are watching this trend closely for indications and confirmation of the downside break on Thursday.
There are more trends in play worth our attention and we will cover them next week as we start the new quarter. Remember, the trend is your friend. Maintain a disciplined approach to managing your money and the risk associated with the market overall.