“Discovery consists of seeing what everyone has seen and thinking what no one has thought”
-Albert Szent-Gyorgi
I often think I’ve seen too much as a trader. From the horrid selling tactics of the financial industry at large to the unintended misleading information that exists within the system. The cynicism becomes systemic. So much so that we as traders often end up believing in nothing and no one. It is with that cynicism that I continue to think the missing link for most market participants is how to quantify long term trends. This is my way of quantifying the long term trends in treasury bonds.
Using the 10 year treasury interest rate, $TNX, we are going to focus on the Monthly bar chart and hone in n the RSI 14 indicator. this will be for the purpose of analysis–not trading. The thing one must take note of is that the RSI does not hit 70 when bonds are in a secular bull market. likewise, it does not hit 30 in a secular bear market. the problem with such long term indicators is that when bonds bottomed in 1981, it took till 1986 to signify bonds were in a bull market. when bonds topped in 1946 it would have easily taken till the early 1950′s to signal a long term shift.
Now, if i was reading a post of a guy talking about a 4-5 year lag id tell him to go stand under a falling tree (actually, id say something far more graphic). So before you have the same reaction, make note that these turns did show divergences in the RSI and if i were actively trading it i would look to other things. In addition, look at how long these trends are.
(source: Barry Ritholtz via Biancco Research)
We are talking about 30-60 year trends! For the sake of analysis, a 4 year lag isn’t all that much. it would be like having a 50 day lag in a 2 year trend.
The goal of this analysis is to help people from their own ego’s. To call a top in a market that can trend for so long can kill an account. Even Bill Gross–”the bond king”–couldnt turn this trend around. He got out and the market proceeded to move 20+% in the opposite direction. Now clearly someone moving that much size can’t wait for the turns that I’m talking about.
For the rest of us, wait for the turn, you’ll have over 20 years to bank on it. Hopefully this will help others think what no one has thought before.
(following bond post will expound upon this concept and break down how i think this information can be traded)
Drew
January 22, 2012 at 10:45
Insightful as always, Ryan. I learned something new from your post. Which is a lot more than I can say about most published mass consumed work. I never realized that the bond market cycles moved that slowly and lasted that long. Good work!