Finance 0

XLU And TLT Suggest That Interest Rates Are Going Down

By Kurt Osterberg · On February 7, 2016

After a gap in time of almost a decade the Fed increased interest rates on December 16^th, 2015,. The SPX has a one day bounce from the news on the day of the announcement, then it turned negative and since that time the index plummeted 13%.

The markets, which were rising, due to the low-interest-rate environment, encountered a rude awakening, catching most investors off guard. Was this a surprise reaction from the market? Absolutely not. Just look back in time and compare interest rates and the stock market. When the Fed starts to raise rates equities typically top out and fall.

On January 29th, 2016, the Bank of Japan lowered their interest rates into negative territory, which inspired the markets, thus causing them to “rally” by 2.4%.

Why is this important?

I had written in my earlier article of how the Fed steps in with a QE, or an interest rate drop whenever there is a significant fall in the SPX. During their recent policy meeting, they maintained their resolve to raise rates, albeit with caution; however, the market is skeptical, today. The Fed is still far from obtaining their inflation objective while the recent GDP numbers came in at a disappointing 0.7%, for the fourth quarter.Suddenly, the economy does not look to be standing on a strong footing.

What is the mood of the market?

Bonds are the best indicator in which they predict what the Fed is likely to do.Take a look at the chart below, of iShares Barclays 20 Year Treasury Bond Fund ETF (NYSEARCA: TLT) in order to understand the mood of the market participants.

TLT should have been declining, since the Fed rate hike was implemented in December. It did begin to decline after the announcement was made but that only lasted a couple days. And with the US markets “tanking”, it has since turned its’ direction around as being a safe haven and presently reflects a fresh breakout (from a 10-month range).

The move has a pattern target of 132.7, which is also a resistance level from an earlier high. This means two things:1) the equity investors are choosing the safety of the TLT rather than “buying the dip”, and 2) the market participants do not believe that the Fed will raise interest rates, anytime soon.