When Things Get Twisted Down Below (HYG,SPY,TLT)

Amidst all the brawling and tussling leading up to the election, several important items were pushed to the back burner that now require our attention.

 

But before we get to them, a quick word on the new president-elect, the market reaction to it, Whoopi Goldberg and Barbara Streisand.

 

Sound and Fury…

 

In the first place, Donald Trump won, apparently fair and square, and we wish him lots of luck trying to fix the deep, systemic problems that plague America’s financial system (snicker, snicker).  We really do.  It won’t be easy.

 

Second, we note that the market selloff was fast in coming.  Overnight, Dow futures registered a 1000 point loss.  That number has backed up significantly through the morning hours and reversed higher to pull the Dow within a mere 18 points of its all-time high (1/10th of 1 percent away!) – nothing like the Armageddon we’d been warned of.

 

Amazing, really.  In the same way the initial selloff in U.K. stocks plagued the post-Brexit vote before the LSE went on to post huge gains, so, too, will we see a tremendous climb before month’s end on the NYSE and NASDAQ.

 

Buy the dip, as they once used to say.  With both hands.  And if you’re of simian persuasion, with all four.

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…Signifying Nothing

 

Finally, we refer to a quite funny posting by news outlet The Hill, which took the time to record all those who said they were leaving the country in the event of a Republican victory.  It’s now check out time, apparently, because not only did Mr. Trump succeed, but both houses are now also in Republican hands, leaving virtually no opposition to the incoming President’s platform and ambitions.

 

And we await moving vans at the houses of people like Cher, Al Sharpton, Barry Diller, Lena Dunham, Samuel L. Jackson, as well as those mentioned above, among others.  Do they really plan to leave?  Were they just threatening?  Did they think they could sway people?  Did they think anyone cared?

 

Let’s see now if they’ll keep their word…

 

Now Back to the Other Earthquake

 

We don’t want to sound dramatic, but there’s presently a seismic financial shift in process to which we want to draw your attention.

 

It involves the long U.S. Treasury bond and the U.S. Dollar, two financial instruments that are presently very likely to move in opposite directions, with a host of implications for the equity market and all who play it.

 

That means you.

 

The World at a Crossroads

 

We don’t want to delve too deeply here, just to reiterate a few salient points.

 

  1. First, the economy is gradually beginning to warm. The rate of the heating is less important than the fact that it’s actually occurring.  After many years of zero interest rates, furrowed brows and endless breast beating over the inevitability of deflation, it’s time to breathe a sigh of relief.  Inflation, however slight, is beginning to bite.  We see it clearly in a gradually steepening yield curve.
  2. That very fact should be enough to trigger several reactions. The first is an immediate and sustained selloff in the fixed income sector as price losses spike rates dramatically higher.

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  1. The country’s current debt burden, and the need to service it by selling increasing quantities of bonds to a public that’s not interested in buying (because rising rates produce a diminution in the value of those bonds), means, in aggregate, a thinner market, lower prices and even higher rates going forward (see chart above).
  2. And that’s horrible news for the Federal Government and its central banking wing, which today hold the title of the single biggest holder of Treasury securities on the planet.

 

And that brings us to our final bit of prophesy…

 

In a move that’s entirely counter-intuitive, we’re projecting that the dollar will look at all the foregoing and very likely rise.

 

Hunh?

 

That’s right, rise.

 

A various assortment of factors, especially foreign cash desirous to climb aboard the U.S. equity train, will conspire to create a surge of buying on the major exchanges.

 

We’ll spell it out more thoroughly in coming issues, but the bottom line is America and the buck will shortly be the last man standing, leaving the investment world no choice of where to place its bets.  That may not seem like a recipe for long-term wealth building, and in truth we can’t vouchsafe for the time frames involved here.  What we can say is a move higher in the dollar is about to begin, at the same time that the long bond folds.

 

Have a look here –3

 

This is the dollar for the last six months, with the post-election action circled in red.

 

The steep drop and subsequent rise accomplished two things:

 

  • it retested support at the long term moving averages (in blue) after the surge that occurred at the beginning of October, and
  • it showed the resilience of the dollar in the face of considerable political uncertainty.

 

In other words, the dollar didn’t give a damn about the election results.

 

Changing of the Guard

 

As for the long bond, her time is done.

 

Take a peek –4

 

The iShares 20+ Year Treasury Bond ETF (NYSE:TLT) shows an orderly selloff underway that has carried step by step in accord with the most important moving averages (red circles).  Very shortly we’ll see weakness that brings TLT to final support at the (yellow) long term moving average.

 

At that point we’ll either get a bounce or a bout of hari-kari.

 

Expect the latter.

 

Bring it on Big

 

Before we trade today, here are a couple of earlier initiatives that require closure.

 

The first was our October 20th trade from Contrarian Sentiment Bullgasm, wherein we urged you to buy the TLT January (2018) 133 PUT for $10.25 and sell the SPY January (2018) 193 PUT for $10.33.  Total credit on the trade was $0.08.

 

Today the TLTs go for $15.05 and the SPYs for $8.76.  Sell the former, buy back the latter and you nail $6.37 on zero initial outlay.  After commissions that’s 4146%!

 

The second was from the following week’s letter, called Let the Risk/Inflation Rally Commence!  The bet was similar to the above: buy the SPY June 223 CALL for $5.18 and sell the TLT June 131 CALL for $5.40.  Total credit on the trade was $0.22.

 

Today, the SPYs fetch $5.61 and the TLTs just $2.81.  Sell the former and buy back the latter and, again, you make off like James Bond.  With minimal commissions factored in, that’s 2013%.

 

Finally, our trade for the week is similar to the above two ventures, but with a slight twist.  We’re going to use the iShares iBoxx High Yield Corporate Bond ETF (NYSE:HYG) as a proxy for the stock market, as we now expect a strong tightening between Junk/Treasury spreads.

 

The trade looks like this –

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

The HYG CALL is nicely in-the-money, the TLT slightly out.

 

Many happy returns,

 

Matt McAbby

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  1. jay shah

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