Unheard of Leverage on Bond Market’s Decline (TMV,TLT,GS)

Unheard of Leverage on Bond Market’s Decline (TMV,TLT,GS)


Is it over?


Is that it?


Everyone’s asking the same question these days: was it just a ‘dip’? Can we get back in? Are we due for another swoon?


Everyone wants to buy back into stocks, and many have been waiting for a good entry point.


But their tender tummies couldn’t handle another dust-up.


So what’s the answer?


Here at Normandy, we say don’t worry. The stock market is poised to climb again, and one needs look no further than the bond market for proof.




This says it all.


It’s the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) for the last six months, and as you can see, tremendous flows of cash came pouring into the fund while the panic was on during the summer months (red line).  More significantly for us, however, was how fast that same cash came racing out of the bond realm after the August 24th top (black square).


For us, that indicated that this was not, in fact, safe haven money seeking a place to dock while the storms were outside a’raging. Rather, they were funds that were temporarily parked from the get-go. This was hot money, and not genuinely ‘scared money’, and as far as the chart reads, we believe it’s just as hot to get back into the equity domain again.


Consider –


The black box above (enlarged below) shows the long bond hanging by a thread to its last line of support at 119. And if that doesn’t hold, we’ll certainly have a retest of the summertime lows around 115. It’s also very likely that we’ll get there sooner, rather than later.


Why? Because both RSI and MACD indicators have just gone sub-waterline, the latter just two days ago, giving us a full-on bearish technical read for the stock, and one we feel should be capitalized on immediately.




Two items, actually.


First, a look at the daily average volumes for the stock (in green) show a decline in trading volume from the summertime lows, through the August 24th retracement highs and down to the present. That is, there was never any real commitment to the buying that occurred, even though the move added some 13% in just 30 trading sessions.


Second, a look at the expanded view of the last week’s trade (below) reveals that a number of moving averages have just unfurled lower (in black rectangle), and with price now trending beneath them all, the prospects for TLT are clear: this is a stock that will not likely ever see 123 again.


Have a peek –




It’s quite possible she’ll never see 119 again.


And from this you gather that stocks are back in play?


You’re darn tootin’!


A rollover of the major moving averages – albeit incomplete at this point – spells doom for any security. Their full unfurling and subsequent southbound incline may yet be a month away, but our figuring speaks to a turning point here, and that means stocks are going to be the beneficiary of plentiful and ever-increasing fund flows as the decline plays out.


But additional evidence is found directly from the charts of the major indexes.


Consider the NASDAQ, for example –




This is not an index under stress.


The NASDAQ needs a nominal 2% gain to again stand above all its moving averages. It’s also just 6% off its all time highs.


So what’s the big deal here?


Moreover, RSI has resurfaced, and even though MACD needs another eight or ten sessions to confirm, there’s little here that points to another dramatic fall in the making.


And while it’s true that the NASDAQ’s profile is superior to the S&P 500 and better still than the Dow, the latter two will catch up, too, friends. Bank on it.




We have a trade update before we get to our action for the week.


A couple of weeks back, in a letter called The Goldman Sachs Strangle/Straddle Calendar Spread, we sold a straddle on Goldman Sachs (NYSE:GS) and, at the same time, bought a strangle. The details went like this –



We sold the GS September 11th 180 CALL and PUT (straddle) for a combined credit of $5.90.



We then bought the GS October 16th 195 CALL for $2.28 and 175 PUT for $5.85, for a debit of $6.95. Total debit on the trade was $1.05.


And now?


The straddle expired last Friday with the short CALL in-the-money. GS closed at $185. 27, or $5.27 ITM, against the $5.90 we collected on the straddle. We’re therefore ahead on our long GS shares by $63 per option sold. And they’re now trading at $183.35.


Sell them.


End of story.


You come away with a net profit on the straddle side of the trade.


And the open long strangle remains.


This Week’s Trade


Let’s return to our opening remarks to get a better handle on this week’s initiative.




1. The long bond looks weak, and is very likely to begin selling off as money flows return to equities.


2. We like leverage – as much as we can safely carry. And there’s a product that allows us a bevy of the old heave-ho for a very nice price.


The product we’re turning to for today’s bet comes courtesy of the Direxion family of ETFs. It’s their 20+ Year Treasury 3x inverse ETF Shares (NYSE:TMV), currently trading for $31.13.


But we’re going to jack up the leverage on the trade even further with an options purchase on the stock.


It’s a speculative at-the-money CALL purchase dated for next February.


Options Trader Elite recommends you consider 1) selling your Goldman Sachs shares as outlined above, and 2) buying the TMV February 32 CALL for $2.15.


Many happy returns,


Matt McAbby

4 comments on “Unheard of Leverage on Bond Market’s Decline (TMV,TLT,GS)

  1. Hi Matt
    I noticed the SP500 has just moved below its 70 week SMA which has been supportive for years.
    I assume you expect the market to move back above this average.on a weekly basis in the immediate future.
    Should that happen it would be very bullish for the marrket.
    The only problem is that elephants may fly before this happens so I will be watching carefully!

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