Bonds About to Get Buried! (TLT,GLD)

The most important development in the financial world today – bar none – is NOT the Greek fiscal crisis and NOT the Chinese market meltdown. Nor is it the impact of the Iranian nuclear deal on the price of oil (though that is a significant issue, to be discussed in its time).

The most salient issue facing investors today is the imminent breakdown of the long bond, a development that will have far-reaching consequences for investors, possibly for years to come, and provide those with the foresight and the courage to place their trades today with one hummer of a profit!

Take a look at the long bond, hereunder represented by the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) –

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As the chart shows, we’re on the cusp of a break below support at 115 (red line). Significantly, that’s also the last line of support offered by the long term moving average (in yellow). Should that line give, it’s likely we’ll see an immediate move lower to between 102 and 105 where the last strong move began.

Will it happen?

Technically speaking, there’s little to commend the long bond today. The moving averages have started to roll over and price is about to be locked under by the short term MA (black circle). RSI and MACD indicators (in blue) are both below their respective waterlines, and even if we get some buying at these levels, they won’t offer a full-on buy signal for at least a week. And that’s a long time in the investment game.

The importance of a break lower in the bond market can’t be minimized. As the trade on Treasuries turns increasingly bearish, cash flows from that asset class will have to be redirected to more profitable quarters. And there’s little reason to suspect they’ll flow into cash and other short-term interest bearing instruments, where returns will also be paltry.

The most likely recipient of the massive outflow from the bond market is as obvious (to us) as it will be profitable –

It’s going into stocks.

The U.S. stock market, and to a lesser degree the trampled upon emerging markets, will hoard the lion’s share of the funds, leading to a pop in the markets that will shortly break the nearly eight month listless meander we’ve seen on the indexes, sending them well beyond their former highs and toward Dow 20,000 and NASDAQ 5500.

 

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This is the way the Bull blows off!

As we’ve stated here repeatedly, we’re in the midst of a liquidity driven bull market that’s artificial in every manner. It’s being pumped higher by an extraordinary quantity of new funds driven into the global financial system by the world’s central banks. And as we’ve repeated ad infinitum, the bull will remain in force until either one of following two conditions is realized –

  1. Either those same central backs begin mopping up all those excess funds currently swamping the system, or
  2. Average people begin to lose faith in the value of the paper money that’s passing through their hands.

Which comes first, is anyone’s guess.

The Most Likely Scenario

We’ve a hunch that as all this new money begins moving at a faster rate and inflationary pressures begin to build in the system, a general loss of faith will ensue that will tank the dollar and send investors fleeing from financial instruments like rats from the U.S.S. ZombieArseCrackHead.

But in the meantime, the result of all this bond market suspense is an equity market agape, awaiting with bated breath the break that we’ve described above. Yesterday’s trade on both the Dow and NASDAQ was so tight, so filled with apprehension that both markets closed just a few hundredths of a percentage point from where they opened! Intraday movement was equally negligible because all eyes are on the bond market, awaiting the crack that will give equities a final green light buy signal.

A Quick Word on Gold

Separately, gold investors should be aware that it’s unlikely we’ll see a resurgence in the price of the precious metals until the aforementioned loss of faith in the dollar and other dollar denominated instruments reaches a threshold that gets people earnestly searching for an alternative to paper money.

Indeed, until that day arrives, gold will either sink or slide sideways toward its ultimate bottom.

Take a look at a chart for gold here –

 

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This is the largest gold bullion ETF in the world, the SPDR Gold Trust (NYSE:GLD), charted for the last six months. And as you can see, like bonds, gold, too, is hanging on by a thread to its support line. The only difference is that gold’s support at roughly 110 also represents its bear market lows.

That said, it’s almost a certainty that gold will continue to decline. In our estimation, the slide won’t be complete until GLD’s simple Fibonacci retracement level is hit at just below $90. That’s close to 20% from these levels.

Not a time to be long.

This Week’s Trade

It’s our feeling that there’s good money to be made from both of the above issues, TLT and GLD. With both trending lower and moving averages either already unfurled and streaming lower or on their way there, we suggest the best opportunity for traders today is to be sellers of options premium. And there’s a good bit on offer for both stocks.

We’re going to sell CALLs on both issues slightly above their respective 137 day moving averages, a line that acts as a solid wall of resistance across nearly every asset class.

Options Trader Elite recommends you consider selling the TLT October 123 CALLs for $1.22 and the GLD October 115 CALLs for $1.31. In whatever quantity and pairings you desire.

With love of the hunt,

Hugh L. O’Haynew

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