Best Be Bond Bound (IEF,AAPL)

Best Be Bond Bound (IEF,AAPL)

Best Be Bond Bound (IEF,AAPL)


We’ve been surprised by action in the bond market of late, where an upward trend appears not only in the making, but at a time when rates are beginning to ratchet higher and the stock market has gotten some traction, one would think that Treasuries had little hope.


Not so.


In fact, before we get to the actual charts, consider a number of fascinating bond market data from the last couple of weeks.


To begin, we are now witnessing the largest short squeeze in the Treasury market since the world was created.


Look here –

Better than $25 billion in Ten Year short futures have been closed in the last seven days.  Never has this occurred in so short a time span.


But more than that, the money didn’t just move to the sidelines.  Those same traders took active long positions in a swing the likes we haven’t seen since Brunehilda Zona’s chandelier act of the late 1950’s.


Have a peek at this –

Over the course of the last two months, nearly $62 billion in 10Y Treasury shorts were closed, moving the net long position in the Ten Year to its highest level in almost a decade (in green).






Hard to say.  What is certain is that the inflow to Treasuries on aggregate has put the group into a net long position again for the first time in nine months.  Have a look –

And even more amazing, in our view, is that this is but the ninth week in the last 150 that have seen net speculative longs in the Treasury complex (in green)


So what’s it all mean?


There are quite a few questions here, but, in essence, they boil down to just one, and that is – where is the money coming from and is it likely to stay?


And to that we have a conditional hypothesis.


Speculative money in the Treasury futures market is some of the most sensitive and intelligent the financial world.  It moves in conjunction with whispers in Washington’s highest ranks, with the banking sector’s best connected eyes in Hong Kong and Dubai and via the intelligence community’s latest issuances from Langley.


So when the moves are dramatic, you have to believe something’s afoot.


But in order to offer you a more complete picture and a more thoroughgoing answer to the question, first have a look at the following –

This is a chart depicting the last twelve months of the Insider Sell-to-Buy ratio, and as you can see, we’ve had two meaningful spikes over the last few months.


What is this ratio?


Simply put, insider selling taken alone is a less than reliable indicator of bearishness on the part of corporate insiders.  Selling among this cohort happens for a great many reasons, including home purchases, weddings, college payments, taxes, etc.


On the other hand, insider buying is usually a trustworthy marker of bullishness, as those with the best knowledge of a company’s workings have little reason to pony up their savings unless they foresee a positive prognosis for their stock.


Taken together, however, the sale/buy ratio offers us a profoundly accurate picture of insider sentiment.  When sales rise sharply and buying recedes just as suddenly, it’s most often a sign that confidence among the elite is waning.  And, indeed, the last time we had an indication like this – in late January – the market was stuck in a sideways grind after the initial Trump euphoria.


The difference between now and then is BOND SENTIMENT HAD NOT YET TURNED POSITIVE.

Divine, Bruny.


Between the recent positive action in the Treasury Bond realm and the most recent Insider Sale/Buy Ratio, we have an emerging picture of nervousness.  And it could well be that we’ll now watch Main Street attempt to play catch-up with the smart money by selling their stocks and jumping into the ‘security’ of Treasuries.


Because that’s exactly what the wise guys appear to be up to.


Have a look below at a cumulative graphic of the sell/buy numbers –

With every new high in the market since the election (in grey), selling momentum amongst insiders gathered steam (black line).


And not only that…


We look now at an additional metric to get our bearings vis-à-vis overall market direction, and it comes from the short interest figures.


Have a look here at the latest figures from the SPDR S&P 500 ETF (NYSE:SPY) –

Short interest on the big cap ETF has shriveled to its lowest level in a decade.  And as you’re aware, at the extremes, short interest is a contrarian indicator.  When nobody is left in the bearish camp, it’s time to get worried about a market decline – as was the case in 2006/07.


Conversely, when the short interest numbers are wildly high, as they were back in 2011, you can bet the market is set to move powerfully higher.


With that understanding, it could be that after one of the best six months in market history, we’re about to see a bout of selling.


So how do we trade it?


In the first place, we believe that the ten year note has some legs under it and could run some 5% to 10% higher over the next few months.  It’s our preference to be long that trade.


We also believe that certain high-flying tech stocks will now undergo a period of retrenchment, moving sideways to lower over the near term as traders digest the latest positive action from that sector.  Our preference is to position ourselves bearishly here.


Together, we’re fashioning a long/short trade that buys the iShares 7-10 Year Treasury Bond ETF (NYSE:IEF) against Apple Inc. (NASDAQ:AAPL), the most stretched of all the techies.


And it goes like this –

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

And the long option expires three months later!


Many happy returns,


Matt McAbby

Leave a Reply

Your email address will not be published.*

Powered by WishList Member - Membership Software



Enter your e-mail address to claim your FREE Special Report “The Seven Deadly Secrets of China”

You have Successfully Subscribed!