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The Prettiest Economic Picture Told In This One Chart

Surprise! It's the TLT ETF, and it tells a compelling story


I don’t know what kind of artwork excites you, but I must confess to a fondness for financial charts.  Here is one of the prettiest I’ve seen in a long time.  Take a few minutes to study it.  It will tell you more than a hundred newspaper articles, TV interviews—or noisy blogs!

What you’re looking at, of course, is a graph of the iShares Barclays 20+ Year Treasury Bond Fund (TLT).  As the name implies, this ETF holds a portfolio of long-dated U.S. Treasury bonds.  Thus, TLT provides an almost perfect mirror of the price action in long-term Treasury paper.

I’ve drawn a two-year chart to give you some historical perspective.  As you can see, the long T-bond (price) peaked in July 2012.   Bond prices then entered a 17-month decline, which bottomed at the end of December 2013.  It was a true bear market, lopping off a wicked 23.5% from the share price of the TLT fund.

Ah, but what has happened since?  Here the story gets very interesting.

Since the beginning of 2014, we’ve heard a seemingly endless stream of forecasts from ebullient Wall Streeters, calling for a pickup in U.S. economic growth—and higher interest rates.

Indeed, many of these predictions have sounded quite plausible.  Almost every day, you can point to some statistic or another that implies the economy is accelerating.  If it isn’t retail sales today, tomorrow it will be industrial production.  Or housing starts.  Or auto sales.  Or something else.

That’s the beauty of focusing on bond prices.  The long Treasury market sums up everything anybody anywhere knows about economic growth (and inflation).  The verdict from T-bond prices enables you to cut through the statistical underbrush and get to the bottom line.

Well, what are Treasury prices telling us now?  Since January 1, they’ve been trending higher—not lower, as you would expect if all those “growth is accelerating” folks were on target.

Moreover, the uptrend in Treasury prices is strengthening.  The red line on the chart shows the 50-day average price for TLT, and the green line shows the 200-day average price.

About a month ago, in mid-March, the 50-day average price broke above the 200-day, a so-called Golden Cross.  This technical event is significant, because it demonstrates powerful, sustained upside momentum.

The reverse phenomenon, a Death Cross, occurred in January 2013, when the 50-day fell below the 200-day.  That breakdown foreshadowed the collapse in bond prices from May to December 2013.

Following on the heels of last year’s wipeout, the new Golden Cross suggests that Treasury prices will continue to rise (yields will fall) for a number of months to come.  If so, economic growth is likely to downshift, disappointing the more enthusiastic of Wall Street’s cheerleaders.

Anemic growth—and its consequence, a flurry of downbeat earnings reports—could well provide the trigger for the stock market “correction” I’ve been advising you to watch out for in the middle months of the year.

It won’t be another 2008, and perhaps not even another 2011.  But prices should pull back far enough to give us notably better entry points on many of the stocks and funds we would like to own.

Article printed from InvestorPlace Media,

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