Fixed income markets are bearish

December 27, 2016 10:13 AM

All fixed income markets are “long-term bearish!” Treasury prices are currently in a decline, within a large trading range. The current decline in prices, within the large trading range, is another necessary step, continuing a multiple step process, which is transitioning toward a long term bear market!

Importantly, price action in November 2016 was a “sign of weakness [SOW].” The SOW indicates that recent price action will continue to transition into a long term bear market. In my opinion, because the analytical indications in all fixed income markets, plus other pertinent confirming markets, are so positive, as the indications apply to a bear market interpretation for fixed income, it is virtually, if not almost impossible, for the long term bearish fixed income analysis to be wrong! Nonetheless, there is never a guarantee!    

Analytically, we must note that macro-price action in 2016 was initially up, but it became a “retest” of the high in price's for 2012, which subsequently resulted in an intrayear downward reversal, closing at new lows for 2016. Additionally, the intra-year reversal and decline in prices in 2016 is in the process of effectively wiping out all of the prior gains for prices, which had started in 2014 and continued in 2015, finally peaking and reversing lower in 2016. Therefore, combined, plus November's 2016 sign of weakness, these macro price actions have initiated the longer term process, which leads to a long term bear market!         

My conclusion, about a long term bear market for the fixed income market, is based entirely on what I refer to, as my improved form of technical analysis, which uses Wyckoff concepts to draw conclusions about individual price action and its trend.  Nonetheless, having developed a point of view, about the developing macro-price action in fixed income, the bearish analysis for fixed income is currently supported by what has been a continuing “bullish price action in equities.”  

Equity prices reversed and rallied in March 2009 to begin a macro-bull market! After having withstood two important corrections to the emerging macro-uptrend, which required that prices absorb selling in a running correction, prices were positioned on the “springboard” in January 2013, ready to extend the existing rally into a more bullish macro-bull “sign of strength,” and “jump across the creek.”  

Fast forwarding, price action in the second half of 2015 through January 2016 was a macro- bullish “back up to the creek.”  Subsequently, as prices begin trading for the last week of December 2016, current price action is trading near 20,000, but more importantly, the individual monthly price spreads, when combined, for November and December 2016, have the potential to have been a “sign of strength” for the renewed up-wave, which began anew at the January 2016 low. As a new “sign of strength” within the new up-wave, there is potential for the new rally to extend in 2017, beyond current price levels, until the rally ends with either a “buying climax,” or instead, “shortening of the upward thrusts.”

As a next logical step, after combining the technical analysis for fixed income and equities, a fundamental conclusion becomes possible. Absent other fundamental developments intruding, equity prices should continue to rally, as long as “real rates” do not become prohibitive. Since the Fed does not currently have a mandate to slow the economy, the Fed should be biased to lag “nominal rates” upward, in a continuing reflation effort, keeping “nominal rates” behind developing inflation. Importantly and interestingly, in support of this premise, notice that the equity market has continued to rally, even as the Fed has raised rates, twice.  

Treasury yields have risen substantially since July 2016, but nonetheless, the equity market has only sustained a shallow and short term correction, after July 2016, before the renewed uptrend in equities reasserted itself, with wide monthly price spreads for November 2016 and December 2016. As explained, these monthly price actions have the bullish price and volume characteristics, which are necessary, for them to become a new “sign of strength.” A new sign of strength, at this point in the renewed rally, would indicate that the renewed rally should have further to run in 2017, before an ending price action can be expected.    

Page 1 of 3
About the Author

Robert Burgess has been a broker and trader, and published the Burgess Technical View, a newsletter featuring his technical views on stocks, bonds and commodities, which developed an extensive subscribership, which included large financial institutions, pension funds, and Fortune 500 companies.  He continues to keep a watchful eye on markets.