We want to discuss the bond market today because we believe it’s at an important inflection point. We’ll have a look at the chart of the long bond to begin with, then turn to some broader market currents to get our bearings for a trade.
But first, let’s address two trades that closed with a loss that now require your attention.
They’re two initiatives that are essentially one – as you’ll shortly see.
Lead on, Maestro!
Last November 4th we launched a trade using the SPDR Gold Trust ETF (NYSE:GLD). Specifically, we recommended you sell the GLD December 121 CALL for $0.56 and the GLD February 100 PUT for $0.98, and buy the GLD June 100 PUT for $2.24. Total debit was $0.70 for the trio.
Two weeks later, in a letter called The Truth about Supply and Demand, we recommended you purchase a second GLD 100 PUT for $1.94.
Gold eventually tumbled, but, alas! from our perch back in November we underestimated just how long it would take to do so. Total loss on the trade was $2.64 in premium, but we’re not happy letting it go with that.
We’re going to recommend you take REVENGE today – thoughtful, introspective and calculated revenge, of course, for as the old saying has it: “Revenge is a dish best served cold.”
And instead of using the GLD ticker, we feel it best to employ the Market Vectors Gold Miners ETF (NYSE:GDX), because the chart there is a lot weaker.
Have a look –
After a 20% rise in five trading sessions, we don’t expect a lot more in the way of immediate gains.
The pop was definitely expected, however, after RSI registered a deeply oversold -20 read (in green). But we can’t imagine a scenario that would lift the miners back above 17.50 – where immediate overhead resistance lies (in red) – over the next few months. Add to that a swiftly declining 137 day moving average (in blue) that will shortly cut below the 17.50 level, and you can pretty much call it a day.
We’re therefore recommending that you sell three (3) GDX December 17.50 CALLs, now trading at $0.89 each, for a total credit of $2.67 and a clean erasure of your GLD debt.
The chart below represents six months worth of the iShares 20+ Year Treasury Bond ETF (NYSE:TLT), the biggest and best scrutinized long bond proxy on the market.
And what’s it saying?
Take a look –
After a very sharp bounce higher that coincided with equity market weakness, TLT has risen to its 137 day moving average (red circle).
And we have good reason to believe that the rise will end precisely there.
First, because the 137 day moving average has proven itself the workhorse in the moving average arena, reliably marking key resistance and support levels time and time again. And because it turned over in early June and has now been gathering momentum on the downside, we feel there’s very little hope for a TLT breakout above that line at this juncture.
Solid Overhead Resistance
Anything, of course, is possible, but the fact that we have a better than eight percent rise in the last thirty days also militates against further gains. As we mentioned above, the move higher in bonds comes on the heels of a swoon in stocks – a safety trade, essentially, that saw investors seek a quick and easy safe harbor in which to drop anchor while investment seas turned stormy.
But what now?
Now that the winds are subsiding and the waves have started to settle, where will the money flows turn next?
With the broad market indexes retrenching and calm returning to Europe and the Far East, we foresee a hasty exit from the pay-nothing vehicle that is the long bond, and a fresh jump back into stocks.
Sentiment, too, speaks to that occurring.
Look below at the AAII bullish percent numbers for the last week –
As you can see, the number of bullish Main Street investors remains marginal, near the lows for the entire six year bull run. And that’s fine by us. It speaks a full measure contrariwise to what will occur in the weeks ahead. Main Street, as you know, is reliably wrong at the turns.
Stocks Should Rise
The bears, incidentally, number just 31.66% on the latest survey, down from over 40% a week ago. That means the NEUTRAL camp represents the largest Main Street investment cohort at the moment, and that speaks to nothing but a great big ball of confusion.
For us, who’ve watched these numbers for coming on 25 years, it’s clear as day that the equity market is set for another burst higher. And when that happens, you can expect the money flows to exit bonds and find their way back into equities in droves.
How do Europe and the Far East fit in?
Simply put, a great deal of the most recent bond buying was triggered by financial events overseas, and the money itself, by and large, was offshore cash seeking a temporary home in the U.S. And it found one in long dated Treasuries.
But take a look now at Europe –
The German DAX lost 14.5 % peak-to-trough in the latest market swoon, but has recovered handsomely in the last month and is now consolidating in the 28.50 range.
The Chinese market, too, appears to have found support at the long term moving average –
FXI lost 26% over the same period, but may have found a footing. The long term MA at 40.50 appears strong, and the Chinese authorities – who have an even greater hand in their stock market than the Fed – aren’t eager to see any further declines.
And that leaves the long bond in a fix.
Our feeling is that selling some CALL premium at this stage is the safest way to play it.
Options Trader Elite recommends you consider 1) selling three (3) GDX December 17.50 CALLs for $0.89 each, as outlined above, and 2) selling the TLT September 126 CALL for $1.34.
With love of the hunt,
Hugh L. O’Haynew