Chart of the week: can rising bond yields help Lloyds?

Lloyds has been exempt from recent market rallies, but our technical analyst thinks that could change.

17th August 2020 12:27

by John Burford from interactive investor

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The high street bank has been exempt from recent market rallies, but our technical analyst John Burford thinks that is about to change.

I last covered Lloyds (LSE:LLOY) in my column on March, 9 as markets were in free-fall at the height of the coronavirus crash. The FTSE low was set a few days later on 23 March, when Lloyds traded around the bombed-out 30p area.

Since then, the FTSE 100 has improved up by a healthy 1,200 pts (25%) - but has Lloyds matched it?

In fact, it has gone nowhere. It trades still in the 30p range. It has not taken part in the strong market rallies of recent weeks.

It is not hard to see why. Bullish sentiment is on the floor as the economy remains pandemic-depressed, while loan margins are still wafer-thin.

But could this relative under-performance be about to change? I have been expecting an increase in bond yields for a while now. Last week my confidence in that outlook improved with US Treasury prices falling after a ‘surprise’ poor US government auction.

Virtually no one expects interest rates and yield to do anything other than move ‘lower for longer,’ with some expecting even more rates to go negative. I am taking the other side of that bet.

So is indigestion setting in to the US Treasury market? With a veritable tsunami of supply to be issued to finance the various bail-outs, any demand hiccough would send shockwaves through the global financial markets.

So this may well be the ultimate test of the fashionable MMT (Modern Money Theory), which claims debt does not matter and sovereigns can rack up their debt to infinity – and beyond - with no consequence to financial markets. We shall see.

But a rising bond yield would do wonders to banks’ earnings – and send depressed equities northwards at a rate of knots.

And my technical studies certainly point to this bullish outlook:

Source: interactive investor. Past performance is not a guide to future performance.

I have a textbook five down off the December 70p high complete with a massive momentum divergence. Remember, a momentum divergence in the fifth wave position usually indicates a trend reversal. And the sharper the divergence, the harder and faster the likely reversal.

I believe the shares are being accumulated by smart money since the March coronavirus crash lows. If so, my first target is the 36p area with higher potential. A simple 50% correction of the wave down off the December high produces a further target around 48p.

If there is more downside first, I do not see much potential for large losses. In fact, trading under the current 29p mark would set up an even better opportunity.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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