Bond Traders Are Rushing for the Exits

Has the next big move in interest rates begun?... Bond traders are rushing for the exits... The 'Bond God' says there's more pain to come... A bullish sign from the oldest stock market indicator... Steve's most exciting 'Melt Up' recommendation yet...

Has the next big move in interest rates begun?

Regular Digest readers know speculative traders have had a love/hate relationship with U.S. government bonds this year. As we explained in the May 2 Digest...

Just a few months ago, speculative traders were holding an all-time-record short position on 10-year U.S. Treasurys...

But remember... because bonds and interest rates trade inversely, a big bet against 10-year Treasurys was also a big bet on higher interest rates. This bearish extreme suggested bonds were likely to move higher, while rates moved lower. And that's exactly what happened...

Since then, rates have drifted lower... Though the move in rates has been relatively small, speculative traders have had a huge change of heart over the same period. They've quickly gone from as bearish as they've ever been... to as bullish as they've been in at least five years.

Last month, we noted that this bullish extreme had become even more extreme. From the June 5 Digest...

Speculators are now as bullish as they've been in nearly 10 years, since late 2007...

As we always remind you, the Commitments of Traders ("COT") report can be a powerful indicator... But like all sentiment data, it is not a precise timing tool. Extreme sentiment can always become more extreme before reversing. And that is still the case today.

But the data continues to suggest the next big move in interest rates is likely to be higher.

Bond traders are rushing for the exits...

Interest rates bottomed just two weeks later, and have been moving higher ever since.

As you can see in the following chart, the yield on 10-year Treasury notes has risen from a 2017 low of less than 2.15% to nearly 2.40% over the past two weeks...

The yield on 30-year Treasury bonds has made a similar move, rising from less than 2.70% to 2.95% today.

And right on cue, traders are now falling out of love with bonds all over again. As Bloomberg reported yesterday...

Hedge funds that built up bullish long-end Treasury wagers to the highest outright level since 2008 are rushing for the exit as a government bond rout that started in Europe following a weak French debt auction is spreading to the U.S. market.

Thirty-year yields surged as much as seven basis points Thursday to 2.92%, breaching both 50- and 200-day moving averages. Open interest in September long-bond futures has dropped by around $3.7 million since June 28 in dollar-value per basis point move, or DV01, terms, a sign bulls are starting to liquidate positions in the sector. Speculators in recent weeks were the most bullish on 30-year Treasury futures on a net basis this year, according to Commodity Futures Trading Commission (CFTC) data.

The rally in rates could continue...

We'll get an update on the situation when the CFTC releases its latest COT report this afternoon. But we expect it could take several more weeks for the bullish extreme to dissipate as traders unwind their positions... which means there's still plenty of "fuel" for rates to continue higher.

But we're not alone in that stance. "Bond God" Jeffrey Gundlach, the CEO of investment firm DoubleLine Capital, agrees. As you may recall, Gundlach famously called the bottom in long-term interest rates last summer when virtually everyone thought rates could only go lower. Now, he's calling for higher rates again. More from Bloomberg...

The recent selloff is a sign of more pain to come for Treasury bulls, according to DoubleLine Capital Chief Executive Officer Jeffrey Gundlach, whose firm oversees $109 billion and said a year ago that yields had hit bottom...

Ten-year Treasury yields are on course to move "toward 3%" this year, Gundlach said in an emailed response to questions. There has "been no justification for the divergent policies in the U.S. versus Europe given economic fundamentals," he said – a point he has made previously. A 10-year yield at 3% would put Treasuries in "definitive" bear market territory, Gundlach added...

Curve positioning may also fuel liquidation in the long end as traders start to unwind overcrowded flattener trades. The spread between five- and 30-year yields is hovering near 95 basis points, near the narrowest since 2007.

A bullish sign from the oldest stock market indicator...

In the meantime, stocks have been drifting lower along with bonds over the past few weeks. And big tech stocks continue to lead the way.

The benchmark S&P 500 Index has fallen more than 1.5% since hitting an all-time high of 2,453 on June 19. But the S&P Technology Sector Index – a subset of the S&P 500 comprised solely of blue-chip technology-related stocks – has fallen more than 3% over the same period.

This isn't a surprise. As we explained in the June 1 Digest, these stocks have accounted for a huge portion of the broad market's gains this year. They led the market higher, so it's not unusual to see them take a "breather" here.

But we're not getting bearish just yet...

As we've discussed in recent Digests, there are plenty of reasons to believe the rally will continue awhile longer. And this week we just got another...

So-called "Dow Theory" is one of the earliest forms of technical analysis. It's based on the writings of Charles Dow, the founder of the Wall Street Journal, and was later popularized by legendary newsletter writer Richard Russell.

In simple terms, it compares the performance of the Dow Jones Industrial Average and the lesser-followed Dow Jones Transportation Average to judge the market's long-term trend. And according to this indicator, the bull market remains intact. As financial news service MarketWatch reported on Wednesday...

[Dow Theory] holds that a healthy bull market is one in which both the Dow Industrials and Dow Transports are more or less equally participating. Warning signs of a potential market top come when one of these two benchmarks fails to rise alongside the other – a non-confirmation, in Dow Theory parlance.

Just such a potential non-confirmation appeared to be materializing in recent months, when the Dow Transports remained well below its all-time high even as the Dow Industrials was rising to successive new highs. Until this week, the Dow Transports had gone more than three months without hitting a new high – since March 1, when it closed at 9,593.95. At one point in mid-May, in fact, the index was more than 8% lower than its March 1 close.

But it has been steadily climbing back since that mid-May low and has reached that new all-time high. Given that the Dow Industrials is also trading at a new all-time high, this means – according to the Dow Theory – that the bull market is alive and well.

Steve's most exciting 'Melt Up' recommendation yet...

Regular readers know our colleague Steve Sjuggerud agrees.

He also thinks the bull market has further to run. In fact, Steve says the "Melt Up" – the explosive final innings of the boom that started in 2009 – is just beginning. And history shows the biggest gains in stocks often happen during this time.

If you joined us for Steve's urgent briefing last week, you already know the name and ticker symbol of one of his favorite "one click" ways to earn triple-digit gains as the Melt Up unfolds.

But Steve says you could do even better...

In the latest issue of his True Wealth Systems advisory – published yesterday after market close – he revealed his highest-upside Melt Up recommendation yet. It's a surprising group of stocks that trounced even high-flying tech stocks during the last Melt Up. From the issue...

The last truly great Melt Up in U.S. stocks happened from late 1998 to early 2000. We call that Melt Up the "dot-com boom" or the "tech bubble."

Investors believed we were entering a new era. The Internet was going to transform our lives. All of society fell into this trap. Everyone believed that "this time was different"... New Internet technologies were changing the world and would send prices up forever.

On the back of this belief, the leading index of tech stocks – the Nasdaq Composite Index – soared more than 200% in the final 18 months of the tech bubble... It turned every Joe Schmoe with an online broker into a day trader. And it minted countless millionaires.

Plenty of good and bad came out of that bubble. But few folks understand what really happened behind the scenes...

They have no idea that tech stocks were not the biggest winner during the last Melt Up.

According to Steve, this little-known group of stocks soared nearly 500% over the final 18 months of the dot-com boom. That's 10 times more than the overall market... and more than double the return of the Nasdaq. More impressive, Steve's research shows the biggest gains happened during the "bottom of the ninth inning" – or the final three months of the rally. More from the issue...

The Nasdaq jumped an astounding 37% in the final three months of the Melt Up. That gain is hard to beat in the history of the stock market. [These stocks] beat it though... As a matter of fact, they crushed it.

In the final three months, [they] soared a ridiculous 139% as the tech bubble came to an end.

Best of all, Steve notes that these stocks aren't on Wall Street's "radar" at all today. This means you still have time to get in well before the big move begins...

Nobody is talking about [these stocks] today. Heck, through the first five months of this year, [they] actually underperformed the overall stock market. To me, that's good. That means we haven't missed the move yet. And that means we're getting in at a low price. It means our upside potential is huge when [these stocks] finally do take off.

This year, the big tech names – like Facebook and Amazon – have already started their moves higher. They have crushed the return of the overall market this year.

During the last great Melt Up, big tech stocks started to outperform during the final 18 months. [These stocks] performed roughly in line with tech stocks for most of those 18 months... But [they] outperformed big time at the very end – the final three months.

Incredibly, Steve thinks his True Wealth Systems subscribers could do even better this time around...

You see, he has found a unique way to buy these stocks that can multiply the potential returns. This opportunity didn't exist during the last Melt Up... But if it had, Steve's research shows that same 500% return would have grown to a life-changing 3,500% gain.

You read that correctly. If this investment had been available in 1998, investors would have had the opportunity to make more than 30 times their money in just 18 months... turning every $1,000 into $36,000. And Steve says a similar opportunity exists right now.

Again, Steve shared all the details with his True Wealth Systems subscribers last night. (If you missed it, you can access the issue immediately right here.)

But if you aren't yet a True Wealth Systems subscriber, it's not too late to come aboard. You can still take advantage of the Steve's special Melt Up offer – including a massive discount off the normal cost of True Wealth Systems and more than $9,000 of FREE research. But you must act now... This offer expires permanently at midnight Eastern time tonight. Click here for all the details.

New 52-week highs (as of 7/6/17): Allianz (AZSEY) and Global X MSCI Greece Fund (GREK).

In today's mailbag, another subscriber disagrees with Porter's advice to spend several years saving capital before investing in the market. What do you think? Let us know at feedback@stansberryresearch.com.

"I also disagree about everybody having to save $50,000 before investing. At my income and expense level that would have taken me 15 years. I started with $2000 my mom gave me and continued to contribute the maximum IRA amount each year and I invested since the very beginning and learned so much on the way. You can paper trade all you want but it is nothing like using your own hard earned money. The emotion and attention just won't be there.

"Yes, I made some big mistakes and followed a lot of bad advisors. At one point, I thought I had a secret chart pattern that never failed so I bought into some golf company that lost something like 50% overnight. That stung but I never made the same mistake again.

"The biggest lesson I learned was stop losses. If you follow them religiously it's hard to have big losses. It took quite a while to get to 50,000 but not so much to get to 100 and now over 200. Your advice is sound, but I'm glad I took some chances to improve myself." – Paid-up subscriber Rick G.

Brill comment: No offense, Rick... but aren't you proving Porter's point?

Regards,

Justin Brill
Baltimore, Maryland
July 7, 2017