Muni Bonds: Most Loved to Most Hated

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK ( ETF Digest) -- After an unusually large inflow of investors, Muni Bonds tanked. How could they go from most loved to most hated?

After Meredith Whitney called for all the municipal bonds to collapse two years ago, they in fact, didn't and investors piled in for the rich tax-free dividend. Last week, Ms. Whitney went double down on her call of the collapse of the municipal bond market as reported by the
Wall Street Journal.

We did see Harrisburg, PA and other municipalities file for bankruptcy. But they restructured and have moved on. This is not something completely out of the ordinary. Just as businesses file bankruptcy and restructure in normal economic times, so have municipalities. Rarely do they catch the attention of the national media. Even New York City has gone though crisis like this, and as of the last time I checked, they're still open for business. If only Greece knew this.

iShares S&P National AMT-Free Muni Bonds (MUB)
may not have seen the last chapter of the story yet.


Okay, I get it. Why would anybody want a measly 3.28% tax-free annual dividend when Apple goes up 3% per day? And this is going to go on forever?

Sorry, but I just can't see all those little old ladies in the assisted living facilities in Florida sitting around watching the one minute candlestick charts on AAPL all day.

For the past two years, investors have been relentless in their search for yield. Granted, we are seeing the initial steps of recovery, but we are far from "out of the woods." As much as the talking heads are ringing the "risk on" bell, they're not getting participation in the overall market as we've seen by the anemic volume.

An over-extended rally on extremely low volume driven by a single equity is a precarious market.

As price drops on MUB, yield will increase.

Volume was the first place I looked on this chart. If volume had fallen off, I would concede the story is over for MUB. That's not the case. After the selloff, bulls are fighting for this position as we've seen over the past three trading sessions. Maybe not enough to run it back up, but holding for the time being.

We saw this same price action and volume when the bulls fought at the lower trend line (blue) and 50-day moving average in late February. They lost that battle. That breach caused the failure of the 40-day low channel for the first time on the chart. However, we have a double support at around $106 with the 200-day moving average and the upper 40-day channel support from September to December.

Relative Strength is in an oversold condition -- almost unheard of on a tax-free 3%+ yield. Stochastics has hit the most extreme oversold condition and is rising. The Money Flow Index shows almost total seller exhaustion.

The MACD is perhaps the most interesting of the indicators. While the MACD and signal line are still in decline, the histogram is rising. This divergence could be signaling a bullish reversal. After all, the MACD is near zero, where else can it go?

If you're looking for something to tuck away in your 401(k) or Roth account to accumulate compounded dividends, MUB hitting 3.4% could be just the ticket. A drop in price would be a godsend.

For a Buy Signal on MUB, watch for the MFI to rise over 20 and a crossover of the MACD line above the red signal line.

Disclosure: At the time I writing, I have no position in MUB.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.