The Fed Is Caught Behind the Curve

I have written many times about how the Fed follows the market and does not lead it. And, we are about to see yet another example of history’s lessons.

For those that followed our work over the years, you would know that we called for a top to the bond market on June 27, 2016, with the market striking its multi-year highs within a week of our call. Since that call, the iShares 20+ Year Treasury Bond ETF TLT dropped 22%, until we saw the bottoming structure develop in late 2018.

So, in November of 2018, I noted to my subscribers that I was going long TLT just as it broke below the 113 level. At the time, many were telling me that I was crazy to go long bonds, as the Fed was still raising rates. The main reason many thought I was crazy was that “you cannot fight the Fed.”

Well, in my case, I recognized that the Fed cannot fight the market. And, the market was suggesting to me it was bottoming out and about to turn up quite strongly. Since that time, TLT has moved from just below 113 when we went long to as high as 126.69.

And, now, the Fed is no longer talking about raising rates, are they?

As far as my expectations, I still think TLT will rally up to at least 131, with a strong potential to see the 135/36 region on the next rally. However, I am still uncertain if that will be in a direct break out over 126.70, or if we see a bigger pullback first. At this point in time, I am leaning towards the direct break out. And, should we see TLT move over 126.70, that would confirm this expectation.

What this means is that the Fed will not only stop talking about raising rates, but you will start hearing discussions about them lowering rates. You see, the Fed follows the market. And, right now, the market is signaling that rates still have lower to go. So, the Fed will have to follow suit.

So, my current prediction is that the Fed is caught between a rock and hard place, and they are behind the curve. Rates will likely still drop in 2019, and the Fed will have to follow the market, and lower rates before the year is out.

Please note: This article was originally posted on FATRADER.com on Thursday May 22, 2019, before the breakout in bonds.

Avi Gilburt recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders and investors interested in fundamental rather than technical analysis.