Treasury Bond and Utility ETFs Near Risky Levels - Here Are Trades

Book profits on TLT and XLU on strength to February risky levels: $149.28 for TLT and $69.83 XLU. Avoid market volatility with savings accounts at FDIC-insured banks.
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Investors have been flocking into what they perceive as the safety of the iShares 20-Plus-Year Treasury Bond ETF (TLT) - Get Report and the Utilities Select Sector SPDR Fund (XLU) - Get Report

These investment choices are now overvalued, with dividend yields of just 2.11% for TLT and 2.89% for XLU. 

My call is to book profits on strength to their risky levels for February at $149.28 for TLT and $69.83 for XLU.

Investors should also consider shifting to savings accounts at FDIC-insured banks. 

Rates between 1.75% and 1.85% should be available without the risk of declining prices on the ETFs. 

An FDIC-insured bank protects up to $250,000 in accounts at each bank you choose.

Some $7.7 trillion of insured deposits are in the banking system, and the deposit-insurance fund is at a record $106.9 billion. Insured deposits are up 79% since the end of 2007 with the deposit-insurance fund having a bit more than doubled, which is considerable safety. 

In addition, the banks have $125.2 billion in reserves for losses, up 23% since 2007.

TLT trades like a stock. It's a basket of U.S. Treasury bonds with maturities of 20-plus to 30 years. As a stock-type investment, it never matures. The interest income is converted to periodic dividend payments.

The yield on the 30-year bond closed Friday at 1.997%. This yield is down 16.4% so far in 2020 with a risky level of 1.85% in February.

XLU represents the Dow Jones Utility Average, which set an all-time intraday high of 944.59 on Jan. 31. This is a year-to-date gain 6.8%. Its risky level for February is 953.20.

The Weekly Chart for TLT

The Weekly Chart For TLT

The Weekly Chart For TLT

Courtesy of Refinitiv XENITH

The weekly chart for TLT is positive with the ETF above its five-week modified moving average at $141.30. 

It’s well above its 200-week simple moving average, or reversion to the mean, at $126.72.

The 12x3x3 weekly slow stochastic reading is projected to rise to 71.8 this week from 61.26 on Jan. 31. The ETF has been above its reversion to the mean since the week of May 17 when the average was $123.99.

TLT is trading between its semiannual pivot at $136.53 and its monthly risky level for February at $149.28. Quarterly and annual value levels are the horizontal lines in the middle of the chart at $129.96 and $124.97, respectively.

Trading Strategy: Buy weakness to the quarterly and annual value levels at $129.96 and $124.97, respectively, and reduce holdings on strength to its monthly risky level for February at $149.28. The semiannual pivot remains a magnet at $136.53.

The Weekly Chart for XLU

The Weekly Chart For XLU

The Weekly Chart For XLU

Courtesy of Refinitiv XENITH

The weekly chart for XLU is positive but overbought, with the ETF above its five-week modified moving average at $66.57. 

It’s well above its 200-week simple moving average, or reversion to the mean, at $54.21. Note how the reversion to the mean provided an important buy level at $47.56 during the week of Feb. 9, 2018.

The 12x3x3 weekly slow stochastic is projected to rise to 89.5 this week from 86.81 on Jan. 31, The latest figure is well above the overbought threshold of 80. This is close to exceeding 90, which would put the ETF in an inflating parabolic bubble formation.

The horizontal lines are quarterly and annual value levels at $62.84 and $63.31, respectively, with its semiannual pivot at $67.70 and its monthly risky level for February at $69.83.

Trading Strategy: Reduce holdings on strength to its monthly risky level at $69.83 and buy weakness to annual and quarterly value levels at $63.31 and $62.84, respectively. The semiannual pivot remains a magnet at $67.70.

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 past nine closes in these time horizons.

Monthly levels for February were established based on the Jan. 31 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.