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Negative Momentum on the TLT Confirms the Uptrend in Bonds is Over

David Becker
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Negative Momentum on the TLT Confirms the Uptrend in Bonds is Over

The U.S. economy is ending the year on much better footing than expected, especially after the surprising upward revision to 5.0% for Q3 GDP growth. The stronger than expected numbers will likely be the catalyst for higher interest rates which could drive the TLT lower.

On the other hand, European and Asian economies have been underperforming, and the weaker growth across much of the world, along with the plunge in oil prices, have weighed heavily on general price pressures, as evidenced by continued declines in CPI data across the globe. The importance for the Fed as well as other G7 central bankers is whether the weakness in prices is more a function of the transitory impact of falling energy costs, or whether it is more a function of the slowdown in growth and declining demand.

To complicate outlooks further, the drop in energy prices is likely to be a net positive for consumers, as well as growth. Prices at the pump have fallen by more than 30% since reaching its peak in June, and given that can put an additional $1,000 in the average US consumers pocket, retail sales will likely be a stronger beneficiary.

Despite the diverging headwinds, US rates are likely to climb during the first half of 2015 putting downward pressure on the TLT. The long uptrend in bonds is likely over as momentum shifts toward assets that will outperform during moderate growth. Although the Fed is likely on hold until the middle of 2015, bond traders are lining up on the short side of the TLT.

Momentum on the TLT has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs as the spread (the 12-day moving average minus the 26-days moving average), crosses below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal.

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