Criticism of technical analysis ranges from bemused skepticism to claims of harebrained alchemy. Few investors as well-respected as Jeffrey Gundlach admit to using it. But yesterday, he explained why he relies on technical analysis under certain conditions.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call at 4:15pm on May 22. The focus of his talk was DoubleLine’s fixed-income closed-end funds, DBL and DSL. There were no slides accompanying his presentation.
Technical analysis will work some of the time and fail some of the time, according to Gundlach. It works when the market’s resistance and support levels are “in sync” with sentiment signals, he said.
“When those things marry together,” Gundlach said, “technical analysis works 70% of the time.”
Gundlach said that he’s been investing professionally for 35 years, and has outperformed the market 75% to 80% of the time. Half of that has been due to technical analysis, and half due to fundamentals and understanding investor psychology and human nature.
Technical analysis and resistance levels were the primary topic in Gundlach’s previous webcast. He said then that if the 30-year Treasury bond breaks through the 3.22% level, it would be a stronger signal of higher rates than if the 10-year yield rises above 3%.
Yesterday, he clarified that call. He said that for the 30-year yield to break the 3.22% level, it would have to close above that on two consecutive days. It closed above 3.22% on May 17 when it hit 3.25%, but the 30-year yield has not yet breached 3.22% on two consecutive closes.
It closed at 3.21% yesterday.
“Don’t get bearish on rates unless 3.22% is breached,” Gundlach warned yesterday.
He said the long bond and technical analysis are what matters. “The last reason to suggest we are in a bond bull market is based on the charts.”
The 10-year yield will be “contained” if 3.22% is not broken on the 30-year, he said. “If it is broken, then the 30-year yield will go to 4%.”
Could the Fed lose control of rates? Gundlach said that could happen only if there is a surprise jump in inflation, such as the CPI going to 3.5%. The yield curve would steepen and the narrative that the Fed lost control would emerge, he said.
Inflation and monetary policy
Inflation will be dependent on higher wages as we head into next year, Gundlach said. Wage inflation “hasn’t happened yet,” he said, and most research says it won’t happen because of automation.
He said the CPI would go to 3% if oil prices move much higher, but then Fed tightening could be a headwind to inflation.
Credit spreads will remain tight until the next recession, according to Gundlach. He said they usually widen six months to two years in advance of a recession. “There is nothing recessionary in the economy now.”
He added that rising rates will not lead to a “meltdown” in credit spreads.
In mid-September of last year, he predicted the best performing sector would be commodities, and yesterday he said he was right. During that period, he said, bonds moved down in price and stocks moved sideways.
“This is not a great entry point for commodities,” he said, “[but] it is an acceptable entry point, and not terrible timing to buy commodities.”
Oil will go to $90/barrel, Gundlach said. WTI crude closed at $72/barrel yesterday. If oil hits $90, he said he would reassess his target price based on economic conditions at that time.
Oil prices will have a negative effect on consumers at the current price level, according to Gundlach. “But it won’t really hurt unless it goes up another $10 or $20/barrel.”
For metal prices to get going, he said, the dollar must weaken. Gold has fallen in dollar terms but has been stable in foreign terms, according to Gundlach. Oil has followed a different pattern and, he said, “is really strong” since it has rallied while the dollar was strong.
Gundlach said the dollar will “run out steam” but may go as high as $95 to $98, based on the DXY. The DXY, the value of the dollar against a trade-weighted basket of currencies, closed at 93.59 yesterday.
“The dollar cannot be labeled as strong,” Gundlach said. “It is only in a countertrend rally.” If the dollar “backs down,” he said that commodities would accelerate higher.
Bitcoin and the mid-term elections
“Bitcoin is a pure play on speculative sentiment,” Gundlach said.
It soars when people are comfortable with speculation, according to Gundlach. But it is falling now and is at approximately $8,000. “If it goes down further, then other risk assets could follow suit.”
Gold prices are not being impaired by cryptocurrencies, he said.
Gundlach offered his predictions for the 2018 mid-term elections.
He said that the Senate will stay Republican and the House will “probably” stay Republican, but they will lose some seats. He said his prediction for the House was “close to a coin flip.”