Browsing some Relative Rotation Graphs, the relationship between Stocks and Bonds, once again, drew my attention.
When I shifted to their respective charts I decided that the current price action of IEF as shown in the graph above deserves our, or at least my, attention.
This ETF that tracks the performance of 7-10 year Treasury bonds broke above an important horizontal resistance level at 106.50 three days ago. It then hovered above that breakout level the day after the break and jumped to a high of 106.97 yesterday.
Today IEF dropped back to that breakout level and is testing it as support. So far it is holding up fine.
Provided that this break holds, this in itself is positive for bonds (meaning lower yields) and the next target can be pegged around the level of the major high at 107.50 that was set back in 2016 and corresponds with yields around 1.4%
In the chart above the relative strength and the RRG-Lines are plotted against VBINX, a balanced benchmark that I mostly use for asset allocation purposes.
The break above the falling trendline in relative strength, with up-sloping RRG-Lines, as a result, suggests that the underperformance of IEF against VBINX is, slowly, turning around.
The current break in IEF, when it holds up, could provide the fuel needed for this shift to continue.
To put things into perspective, the RRG below shows the rotation, based on daily data, of IEF and SPY against VBINX and it clearly shows the improvement of IEF over SPY for the time being.
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Julius de Kempenaer
Senior Technical Analyst, StockCharts.com
Creator, Relative Rotation Graphs
Founder, RRG Research
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About the author:
Julius de Kempenaer
is the creator of Relative Rotation Graphs.
This unique method to visualize relative strength within a universe of securities was first launched on Bloomberg professional services terminals in January 2011 and was released on StockCharts.com in July 2014.
A graduate of the Dutch Royal Military Academy and former captain in the Dutch Air Force, Julius first began his career in the financial industry in 1990 as a portfolio manager.
He is now the director/owner of RRG Research in Amsterdam.