Is The Bond Market Toast? Sunday 28 February 2021

· Signals galore in the bond universe. IEF and MBB flagged as “Sell the Bounce” while SHY and LQD are coming out in the “Mind the Squeeze” quadrant. What the heck is going on?

· Let us begin with IEF.

· Below is an efficiency test in Timing Solution © for this signal on IEF over the last ~15 years.

· The window of observation is 60 trading days before and after the culmination (vertical dotted green line) of the signal.

· The thick blue line shows the average movement of IEF during the window with the culmination marked as 0% on the vertical axis. Therefore, this signal is typically triggered after a ~4% decline in IEF.

· What is interesting is what happens after. 71% of the time the market will continue in a downtrend for another ~2 months (black arrow). This is against a control of ~44% thus resulting in a Chi Square statistic of 12.6 and an infinitesimally small p-value a.k.a statistical significance.

The red/blue shaded regions show the preponderance of tops/bottoms respectively (leading to > 3% swings). Therefore, the historic tendency is for the market to temporarily bottom on the culmination, experience a bounce and then resume the downtrend into a secondary bottom ~2 months post culmination.

In Timing Solution we can bring up the previous culminations as below. Here are two examples. November 2020 (dominant behaviour) and March 2012 when things did not work as expected.

A quick histogram of the returns.

· While MBB is in agreement, the LQD signal seems at first to conflict with IEF. However on closer inspection we find that the safe period to buy for a reversal in trend, coincides with the secondary bottom expected in IEF.

In fact the most statistically significant period of strength is a one- to two-week sliver of the black arrow below which shows “UP 80%” with p-value of 0.2%.

Two quick bonuses. First, we use the Self-similarity module to extract the most correlated periods from history and we can select the relevant ones to add the green line in the chart below. Second, using the Turning Points Analyser module, we can extract the most common historical swing ratios to define confluences for support and resistance levels (blue and red shaded regions). What these suggest is to look for the market to potentially roll over in the 166/117.5 region and then target 111/112 or even 107/108 longer-term. This off course opens up an interest conversation regarding the FED, inflation expectations and a lot more.