Back on January 10, Mike Paulenoff alerted MPTrader members to a developing macro market setup that could provide a directional opportunity longer-term in the widely held interest rate ETF, the TLT (20+ Year T-Bond ETF).
Mike wrote: "Jay Powell will appear before the Senate Banking Committee tomorrow morning to attempt to secure his renomination as Fed Chairman right as the TLTs are bearing down on a 6-month support plateau in and around 141.15/35, which means he could preside over a MAJOR breakdown in longer-term bond prices (another upside thrust in 10-year YIELD from today's 1.8% towards 2%), or alternatively, say "something" that leads investors and traders to believe that the Fed is unwilling to see the equity market come unhinged (in so many words), thereby triggering a violent recovery rally in TLTs that amounts to an attempted resumption of 'The Fed Rate Suppression Trade.'"
Mike added, "My sense is that any such rate suppression effort is different this time because of the relentless upward inflationary pressures. In other words, any rally in TLTs will be a short opportunity (long TLT puts) for the Bond Vigilantes (they're back!)."
Much has transpired in the macro world since in the past five weeks, most notably the 1/05/22 Fed Minutes that realigned investor perceptions of the Fed's concern about inflationary pressures, followed by the FOMC Policy Statement on 1/26/22 that further "reset" investor expectations that Powell and Company intended to end Quantitative Easing by the end of March and begin a series of 25 bps interest rate hikes at its mid-March FOMC Meeting.
Along the way, supporting a restrictive shift in monetary policy have been data points that have reinforced strong economic growth, upward pressure on Jobs and wages, relatively strong earnings (notwithstanding the FB debacle), and perhaps most alarmingly, the persistent climb in oil prices that hit $93/bbl this past Friday!
The visual representation of investor attitudinal "readjustment" to a changing, i.e., less friendly interest rate environment, is shown on the attached 4-hour TLT Chart, which reveals an inability of any rally efforts in TLT to chew through a heavy, multi-month resistance plateau lodged from 143.50 to 144.50 prior to breaking down in a major way last Friday in reaction to a surprisingly strong January Employment Report that restricts Fed options heading towards the consequential March FOMC Meeting.
In a word, the TLT setup is ugly. In the absence of a substantial and powerful "opposing force," both technical and fundamental headwinds are positioned to intensify, sending TLT considerably lower (longer-term rates higher) in the weeks ahead.
Since Mike first alerted members on January 10 about a potential breakdown in TLT, the bond ETF has declined from 141.73 to 139.50, or 1.6%, and has provided a partial hedge for members' equity portfolios during an especially volatile four weeks.
Uncertainty will continue. As fate would have it, the next macro data point of intense interest arrives on Thursday in the form of January CPI. Lack of any moderation in either the Month-Over-Month or especially the Year-Over-Year 7%+ trajectory of Consumer Prices will heighten trepidation about forthcoming multiple 25 basis point rate hikes and possibly a "downpayment" March hike of 50 basis points!
Join Mike and our members for their real-time intraday discussions of technical and fundamental factors impacting macro indices such as the TLTs, ETFs, individual equities and sector ETFs, commodities, cryptocurrencies, et al during this very exciting and opportunistic period in the financial markets.
