Wall Street's Latest Lie: The Great RotationApr 09, 2013
Chad Karnes, CMT
When Wall Street was bearish bonds and bullish stocks behind the rallying cry of the "great rotation" we were warning that the facts just weren't supporting such a scenario. In the meantime buying bonds in February and March provided a 6% return in under a month.
In February and March when Wall Street was busy talking about the “Great Rotation” and telling investors to get out of bonds and into stocks, we were providing reasons to actually be bullish bonds.
But, how and why did we recognize the opportunity to go long bonds when the majority of Wall Street was clamoring to sell bonds?
For starters: checking the facts, ignoring Wall Street, and utilizing some common sense.
The Great Rotation Myth
News headlines frequently provide us clues as to what Wall Street is trying to sell Main Street which in and of itself can often be a reason to do the opposite. (We don't use headlines as an exclusive indicator, however.)
The latest example was the “Great Rotation” that dominated late January and early February’s news headlines.
Once the money flow data was released for January showing decade high Mutual Fund (Nasdaq:VFINX) and ETF (NYSEARCA:VTI) inflows, Wall Street went crazy with reports that the “great rotation” was in full swing as it justified buying equities (NYSEARCA:VT) at the expense of selling bonds (NYSEARCA:BOND).
Remember these headlines?
“Have we entered the Great Rotation?” – Charles Schwab 2/6/13
“Are we watching a Great Rotation into Stocks?” – Time Magazine 1/28/13
“Trading the Market’s ‘Great Rotation” – MarketWatch 2/7/13
How about this for a headline: “They Were Wrong, as Usual” – ETFguide.com.
There was indeed no great rotation occurring as we suggested in our article from 2/21. We stated, “The facts simply don’t support such a scenario of recent rotation”.
In reality, the great rotation has been out of stocks (NYSEARCA:IVV) and into bonds (NYSEARCA:TIP) as bonds have outperformed stocks significantly since February 1.
Another Reason: the Technicals
In our 3/20 Technical Forecast we published the following chart of the iShares 20+ year Bond Fund (NYSEARCA:TLT) which, along with our focus article in our March ETF Profit Strategy Newsletter published 2/15, helped us get bullish on bonds in early March.
Each time in recent history when bond prices made a new price high or price low accompanied by a volume spike, they typically reversed their trend (as identified at the bottom of the chart).
Combining this technical backdrop with the fundamental and sentiment analysis we outlined in our 2/15 Newsletter helped us get comfortable picking a bottom on bonds as we suggested in our 3/10 Technical Forecast, “Given the positive divergence and volume spike low, aggressive traders can go long here with a tight stop below Friday’s low of $114.62”.
That stop was never in trouble as bonds immediately reversed their trend and rallied to $122.
Where do Bonds Stand Now?
After rallying 6% since those long suggestions, TLT was again accompanied by a large volume spike along with a few negative technical signals. We suggested for traders to take some profits on 4/3 and longer term holders to also cash out on 4/7 which accompanied the following chart showing another volume spike warning after a huge move up.
We followed up our advice by writing: “Shorter term traders again may want to take some profits off the table with such an outlier of a move Friday. Now accompanying the rally is an overbought RSI as well as another volume spike (see chart) which may mark a short term top here.”
After rallying 6% in under a month, it was a great trade and time to realize profits. Bonds have since given back some of their gains. Will the uptrend re-continue? What will be the next short term signal to go long?
Ignoring Wall Street's rhetoric and focusing on the facts that mattered most helped us identify a high probability trading opportunity as the great rotation out of bonds turned out to be the great fake rotation.
The ETF Profit Strategy Newsletter uses common sense along with technical, fundamental, and sentiment analysis to stay ahead of key trends in the stock, bond, commodities, and forex markets.Follow us on Twitter @ ETFguide