The Federal Reserve implemented what I will call Quantitative Easing Everything, or QEE. The central bank is buying all types of bonds, including U.S. Treasurys, corporate bonds, municipal bonds and mortgage-backed securities.
So far, investors appear not to be thrilled with the continued moves by the Fed.
As a longtime Fed watcher, I find it ridiculous for our central bank to buy any amount necessary of every type of security.
The Fed thinks that adding debt on top of a record debt bubble will help the economy and stabilize the stock market.
The treasury bond ETF is a basket of U.S. Treasury bonds with maturities of 20-plus years to 30 years. As a stock-type investment, it never matures. Interest income is converted to periodic dividend payments.
The junk-bond ETF offers a basket of bonds with at least one year to maturity. Each bond must have $600 million or more of face value outstanding.
The Weekly Chart for TLT
Courtesy of Refinitiv XENITH
The weekly chart for TLT is neutral, with the ETF above its five-week modified moving average at $154.40.
It’s also well above its 200-week simple moving average, or reversion to the mean, at $127.61. The ETF has been above this average since the week of May 17, 2019, as a successful flight-to-quality investment.
The 12x3x3 weekly slow stochastic reading is projected to fall to 68.9 this week from 77.26 on March 20.
This reading is declining as the week of March 13 was extremely volatile. Investors shifted back and forth from stocks to bonds, then back to stocks again.
This ETF is up 17.7% year to date and in bull-market territory up 43% since the week of November 2, 2018, when it bottomed at $111.90.
The ETF is trading between its monthly pivot at $155.39 and its weekly risky level at $164.10. Semiannual, quarterly and annual value levels are $136.53, $129.96 and $124.97, respectively.
Trading Strategy: Buy on weakness to its monthly value level at $155.39.
I have been negative on junk bonds as the yield spread versus treasurys just keeps widening. TLT is up 17.7% year to date with JNK down 21.4%. JNK moves with the stock market, not the treasury bond market.
The Weekly Chart for the JNK
Courtesy of Refinitiv XENITH
The weekly chart for JNK is negative, with the ETF below its five-week modified moving average at $98.72.
This ETF crashed below its 200-week simple moving average, or reversion to the mean, during the week of March 6. This moving average is now $108.25.
The 12x3x3 weekly slow stochastic reading is projected to decline to 31.56 this week from 41.65 on March 20. This ETF is thus not yet oversold, as that threshold is 20 on a scale of zero to 100.
The horizontal lines are the weekly, quarterly, annual and semiannual risky levels at $95.80, $104.86, $107.03 and $114.58.
Investor Strategy: If the Fed is buying corporate junk bonds, this ETF should rebound. But I do not have a value level at which to buy on weakness.
How to use my value levels and risky levels:
The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.
Monthly levels for March were established based on the Feb. 28 closes.
New weekly levels are calculated after the end of each week.
New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share-price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.
A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.
A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.