What Are Bond Traders Thinking?

TLT is the iShares 20+ year Treasury Bond Fund ETF. It reflects the prices of longer-term bonds. A bond ETF doesn't usually capture my attention. But this one did.

On the daily chart TLT is just breaking above resistance formed by the February 2016 high.

Looking at the weekly chart, over a longer time period, I found a similar pattern. TLT is about to break above early 2015 highs:

Of course I had to check the seasonal pattern for TLT. Usually, there isn't much of a track record with TLT. But this time of year is different.

There is a decent track record for buying TLT at the start of this week (the first full week of June). Let's focus on the next 12 weeks. From the start of this week, TLT has returned an average 2.5% over the next 12 weeks, with gains in 9 out of 13 years (a ‘win' rate of 69%).

I know what you're thinking – is it worth considering a trade that has averaged only a 2.5% return over 3 months? Well, a 2.5% return over 12 weeks works out to a 53% annualized return. I think most traders and investors would be happy if they could generate the equivalent of a 53% annual return on every trade they made.

Now let's look at entering a TLT trade on Monday, the start of the second full week of June, and we'll focus on the same ending date (so the time period is 11 weeks this time). From the start of this week, TLT has returned an average 3.0% over the next 11 weeks, with gains in 10 out of 13 years (a ‘win' rate of 77%). The odds are getting better. And the annualized return is now 64%.

Finally, let's look at entering a TLT trade on a week from Monday, the start of the third full week of June, and we'll focus on the same ending date (so the time period is 10 weeks this time). From the start of this week, TLT has returned an average 3.4% over the next 10 weeks, with gains in 11 out of 13 years (a ‘win' rate of 85%). The odds are even better, and the annualized return is now 73%.

Of course, stocks do not follow exact seasonal patterns. TLT, or any other security, will not wait for the historically-optimum time to break out. Many breakouts, if they are going to happen at all, will start sooner, and some will start later. But this pattern of good returns, on a relatively low beta ETF, strongly suggests the ETF has good chances of repeating previous successes this time of year.

Now for the odd part. Bond prices move inversely to interest rates. The strength in this ETF suggests traders are expecting interest rates to decline. That's especially interesting in light of next weeks' Fed meeting where the Fed may or may not raise rates for a second time. TLT has a good seasonal pattern over the next 10 to 14 weeks. So a rise in this ETF over the next several weeks would not be unexpected. But it's still interesting because of the Fed meeting. What are the institutional traders thinking?

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.

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