iShares 20+ Year Treasury Bond ETF (TLT) & iShares US Home Construction ETF (ITB)

Equity markets have continued to churn sideways this week with rally and selloff attempts quickly being reversed the following day. Similarly, a seven-trading day rally in WTI Crude Oil ran out of steam and was followed by a correction of two days and counting.

US treasury yields continued to climb toward 4.35%, close to their October 2022 peak as investors anticipated a “hawkish hold” decision from the Fed which essentially came to fruition. The US central bank held the Fed Funds rate at 5.50% yesterday. FOMC members maintained their forecast calling for one more rate hike this year, likely in November to continue an every-other-meeting pace. For 2024 Fed members were less dovish, forecasting 0.5% of rate cuts compared with their June forecast of 1.0% in rate cuts for 2024, meaning keeping rates higher for longer. FOMC members raised their GDP forecasts for 2023 and 2024 and left their inflation forecasts essentially unchanged.

One word to describe trading action across most sectors this month has been “congestion”. A look across sector ETF charts suggests that outside of Energy, there have been no significant breakouts, and outside of construction or alternative energy related groups, there have been few significant breakdowns either. The majority of groups find themselves sitting near the middle of trading ranges currently.

This indecisiveness can also been seen at the Country level where the split between gains and losses among the Country ETFs we follow has been about 50-50, with Japan plus resource producing countries near the top of the list, and China plus Germany among the notables near the bottom of the list.

Today’s Bank of England meeting was the last major central bank decision for September. The end of the month and quarter are fast approaching. Tomorrow is Quadruple Witching Day and also brings Flash PMI reports on economies around the world. Next week’s economic calendar is dominated by US housing news.

It’s a light week for earnings news headlined by Costco on Tuesday and Nike on Thursday. Confession Season has already started with the profit warnings from airlines earlier this month, so investors may start to watch for preannouncements from other sectors to see if the impact of rising interest rates or rising energy costs is relatively contained or having a wider impact.

In this edition of Equity Leaders Weekly, we look at what impact expectations of “higher for longer” interest rates have had on bonds and on the homebuilding sector.

Mirroring the rise in US treasury yields since 2020, bond prices, represented here by the iShares 20+ Year Treasury Bond ETF (TLT) peaked in 2002, staged a major Spread Quadruple Bottom breakdown in the spring of 2022, and snapped a long-term 45-degree uptrend line in late 2022.



TLT spend the first eight months of this year in a holding pattern in what looked like base building but since has become clearer as consolidation of losses. With fears of an imminent recession fading and a growing sense that the Fed may need to keep interest rates higher for longer than previously hoped in order to get inflation back under control (a task potentially becoming more difficult with wage demands rising), US Treasury Yields have started to climb once again putting pressure on bond prices.



In recent weeks, TLT has turned downward once again. Earlier this month, TLT completed a bearish Triple Bottom pattern and has continued to decline, opening the way for a potential retest of the November 2022 low near $88.45, or the $78.50 to $81.70 zone based on a previous column high and a horizontal count. Initial resistance appears near $99.55 based on a 3-box reversal which is also close to a test of potential resistance at the $100.00 round number psychological barrier. With a bearish SMAX score of 0, TLT is exhibiting weakness across the asset classes.

US homebuilders, represented by the iShares US Home Construction ETF (ITB) may attract particular attention in the coming days as US monthly housing data continues to roll out. Perhaps as a result of the cumulative effect of rising interest rates over the last year, housing data has started to soften.

The National Association of Home Builders (NAHB) Housing Market Index has dropped sharply over the last two months from 56 to 50 and then to 45. Meanwhile, at last report, housing starts were below expectations, and House Prices have started to come down.

With other interest rate sensitive sectors such as Utilities, Financials and Real Estate declining in recent weeks, it comes as no surprise that ITB has started to roll over as well. Since peaking in August ITB has declined about 9%, established a lower high and completed a bearish Triple Bottom pattern to signal the start of a retreat.

Next potential support appears near $72.25 based on a horizontal count, followed by $70.85 based on previous column highs. Initial resistance on a bounce appears near $84.75 based on a 3-box reversal.