Corporate bonds on borrowed time - TMAR time too

Corporate bonds are now on borrowed time now, or actually just past that point! The corporate bond ETF - $LQD - reached the key level of $121, on noticeable negative divergence. One big reason that price level was important is that it represents the Fibonacci 2.618 extension of the drop $LQD made from just above $85, into the 2009 panic low at $61.56. Price has essentially doubled that low, too. Of course, this high also occurred just when it was dawning on many investors that it's safer to be in equities than many had realized. Look at the precipitous drop $LQD displays on its daily chart:

Not that equities won't have scary drops and bumps on a generally upward path ahead. But at what point do corporate bond investors stop accepting painfully low returns? Returns that practically provide a negative return, measuring in terms of dropping currencies for some, and inflation or opportunity costs for others?

Looking at the weekly, and the monthly chart of $LQD (still has old markings I'd made about channels and other Fibonacci levels that could have been hurdles, all cleared easily), you'll see that selling volumes jumped and the indicators turned negative after price reached $121.06. That level was the 2.618 extension which would be a very extended target of the "bullish butterfly"; measured on the drop into 2009.

The negative indicators, coupled with the fundamentals environment and Fibonacci level, combine to say a lot of smart money has exited. At least for now, that's the read I get. TMAR means take the money and run ... it's a reference to locking in gains of course. If you're investing or trading this sector, it's time to view this as a trend change from bullish to bearish. The only caveat is, a resumption making $121 support again in $LQD. Unless that happens, treat that price level as a ceiling. Otherwise, having tested its 50-day moving average (see daily chart), $LQD may mount another effort on its Bollinger Band midline, before a test of the 200-day moving average. Lower support appears in the chart at $109, $105, $99, and even $87. Maybe corporate bonds have another dazzling rally ahead, but it seems that the near-term and intermediate-term likelihood is for a consolidation to test support first.

The P&F chart also shows that $LQD overshot a projection to $87. Falling under the reversal level of $116 could set up a test down to $109, $99, and of course $87. Given how it shot up, that would feel like a big drop (but still just retesting that $85 area from which it had dropped).

Fundamentals do matter, of course. Those wishing to research more about $LQD might want to read an article written in January last year, when it was trading at $114.51, by The Financial Lexicon at http://m.seekingalpha.com/article/319877. Here's a quote to consider: "...as of January 12, 2012, of the 739 different CUSIPs in the LQD, only 103 had market prices under par (100 cents on the dollar). Of the 103 CUSIPs trading under par, only 9 were trading under 90 cents on the dollar. Of the 636 CUSIPs trading at par or higher, a whopping 365 were priced at 110 or higher, and 55 were even above 130 cents on the dollar."

That article has a lot more interesting information for those looking into the fundamentals of $LQD as such.

Given these are corporate bonds, not stocks, one has to realize that it doesn't make much sense for price to rise too high above par. Somewhat above, sure, as interest rates generally drop and companies' prospects improve. But with interest rates generally at record lows and likely in a turning point, and equities offering better returns if companies really are doing that well, there are some constraints on how high corporate bonds can go in price. The charts suggest a significant high has been reached.

// Disclosure: No position in $LQD or any corporate bonds.