Three months ago the talk du jour was all about rising interest rates ahead. Some of the common headlines from that period were things like:
Rising Interest Rates Achilles’ Heel of US Recovery
Buy Gold if You Think Interest Rates Will Rise
Why Interest Rates Must Rise
Today, after 7 years of ZIRP, the Federal Funds Rate still sits between 0.25% and 0.5%, having hardly gotten up off the mat since 2009.
Three months ago there was one source that quietly signaled lower interest rates ahead – the TradeStops SSI system.
The first important indication from the TradeStops SSI was the correction in Ten Year US Treasury Notes which just dipped into the SSI yellow zone. The yellow zone tells us when a security has fallen a bit more than half-way from its recent high to its volatility-based SSI stop loss level.
Here’s the chart:
I pay a lot of attention when a security dips into the SSI yellow zone. In particular, I want to see how the security responds. Does it continue to fall or does it bounce nicely out of the yellow zone and start to resume its uptrend? I also look at what the SSI trend indicator is doing. Is it up, down or sideways?
There were other signs of lower interest rates ahead. There’s a category of stocks that follow Treasury prices higher and lower. And these stocks have been strongly bullish for several months now. They quietly triggered new SSI entry signals back in March as all the talking heads were predicting the demise of these stocks.
I’m talking about Utilities and REITs. These are the stocks that get left in the dust when the stock market makes huge moves higher. But when interest rates move lower, these are the companies you want to own. And not just for the good dividends.
XLU, for example, is the SPDR Sector ETF that invests in Utility Stocks.
XLU gave us a buy signal on March 15th. Before the bad jobs report, before the Fed pulled interest rate increases off the table for a while. Since that date, XLU is up 3.68% while SPY (the S&P 500 ETF) is up 2.69%. And the annual dividend on XLU is almost 3%.
Utilities are not the only stocks that are sensitive to interest-rate moves. The real estate stocks are also sensitive to rates.
VNQ is the Vanguard Real Estate ETF. It gave a buy signal more than 6 months ago back in December 2015. Three months ago it dipped solidly into the SSI yellow zone and rocketed back out to new highs with strong support from its SSI trend indicator.
This ETF is up over 12% in 6 months and it pays a dividend of over 4%. In the same period of time, SPY is up only 2.04%.
Today there is a lot of uncertainty over where interest rates are ultimately headed. The voices are pretty loud on both sides of the aisle. I personally continue to see evidence that interest rates will continue to go lower for a while.
There is the weight of evidence from the TradeStops SSI system which shows that interest rate sensitive asset classes like utilities and REITs are in strong uptrends after triggering SSI entry signals. The same is true of Ten Year T-Note prices.
Moreover, Ten Year T-Notes recently broke out above their overhead volume-at-price resistance (VAP) and the smart-money commercial hedgers continue to bet big on higher T-Note prices (and lower interest rates) to come.
Three months ago those predicting higher interest rates had the loudest voices. The TradeStops SSI system suggested otherwise. The experts were wrong then. I’m betting that those predicting higher interest rates today are likely to be proven wrong again.
Have a great weekend!