Several weeks ago, the 10-year interest rate on U.S. Treasury
notes jumped to 2.7%, the highest in 15 months and 42% above
where rates were one month prior.
But 2.7% is still quite low from historical standards. As
recently as mid-2007, the 10-year was over 5%, and over the last
35 years the rate has averaged 6.89%.
Is more upside potential from here?
One would think so, but I'm here to tell you that's not the
case. Here's why…
Bonds, as witnessed by the
iShares T-Bond 20+ (
, closed below its lower Bollinger Band last week. Take a
Bollinger bands are lines that track a stock's moving average
price (the dotted line) in the middle, the upper line which
represents 2 standard deviations above the average, and the lower
line which represents 2 standard deviations below the
In short, when an underlying asset breaks the outer bands,
it's a rare occasion. It tells us that the stock has moved too
far in one direction too quickly.
And typically, a short to intermediate-term reversal typically
follows. In the chart above TLT has broken the lower band
which is often interpreted as a "buy' signal by most professional
As you can see, that happened two other times over the past
year - in September and February. Following each signal, TLT
moved significantly higher over the next five months.
Also, notice the 14-day relative strength indicator (RSI)
below the chart. RSI (14) provides an intermediate term (3-6
months) measure of overbought or oversold conditions. Each
instance noted on the chart marked areas of extreme oversold
readings. When this type of reading occurs coupled with a breach
of the Bollinger Band a move a reversal in the current trend is
soon to follow.
Economic forecasters would have you follow employment reports,
manufacturing index readings, real GDP growth, yield curves and
the like. But I can tell you that professional traders,
particularly professional options traders, don't care about the
latest economic data. We prefer to keep things simple.
Applying this model, unless you truly believe the FOMC is
about to hike interest rates, which Bernanke adamantly
denies doing for the foreseeable future, the 10-year rate
is unlikely to rise much further.
So what does this mean for income investors?
Well, for 2013 it probably means more of the same.
Dividend-yielding stocks should continue to perform well. And for
those of us who
on those highly-liquid, blue-chip dividend stocks like MSFT (
), Altria (
), AT&T (
) we should expect to see success until year's end.
If you are interested in learning more about conservative
options selling strategies please feel free to email me at