“Bond. Lamest Bond” (TLT,QQQ,USO)
We’ve been talking about the end of the nearly 40 year bull market in bonds for some time now. Indeed, we’ve been early on a couple of occasions explaining the case for its demise, even errantly putting our money where our mouth was. We admit now we were early, eager and foolhardy.
It happens, sometimes.
Part of the business.
Yet today, with all signs again militating in favor of just such a rollover, viz. a rising rate regime, a Fed that projects its intentions to continue tightening, a bond market that appears to be accepting the threat, and both the inflationary and corporate earnings backdrop to support it, we see there are still some who are unable to swallow the case for a coming bear market for bonds.
Case in point: Morgan Stanley, no newcomer to the world of Treasury investing, turned bullish on the long bond less than a month ago. In a move that’s astonishingly contrarian, the bankers at that esteemed outfit claimed that “trade tensions, declining equity markets and subdued inflation” are forcing it to recommend clients bulk up on the ten year note.
We would be all in favor of Morgan Stanley’s call if we suspected there was an immediate risk of world war, or a financial or market breakdown was upon us (or on some other major western power), though those things may, indeed, come to pass in the fullness of time.
But they’re certainly not imminent. So there will be no flight to a Treasury market safe haven in the months ahead – at least not the way we see things developing.
There could be a dip in the equity market, yes, but no worse than what we saw in January, and certainly not an extended affair.
On the contrary, we see the current trade tensions as a passing phenomenon, more of an effort to set a tone for serious negotiations than a long term program toward isolation. And as for equity markets, we see no evidence that the bull is over, though we admit recent weakness may drag the stock market sideways for another brief spell.
And as to “subdued inflation”, we simply don’t believe it, nor do we see it in the charts. The commodities are in a rush higher, led by oil, and that trend Won’t be concluding anytime soon.
Inflation is here. It’s operating. And there’ll be more of it.
But more than just the observable trends and price tendencies that obtain, we also see in the very chart of the long bond the potential for a tremendous breakdown. In fact, all three, daily, weekly and monthly charts, are pointing toward a cataclysmic sell-off that could throw capital markets into a tizzy until some kind of equilibrium is reached.
But we get ahead of ourselves. Have a look at the charts. We’ll discuss possible scenarios thereafter.
First up is the daily chart of the iShares 20+ Year Treasury Bond ETF (NYSE:TLT).
And as you can see, the last six months of trade have been weak. With all the major moving averages trending lower and nearly unfurled, the momentum is clearly down (in blue). And a roof is forming at 122, where the 137 day moving average is fast descending (in black).
Beyond that, we see both RSI and MACD are currently weak, trending below their respective waterlines (in green).
That said, the weekly chart for TLT is even more dire. Have a look –
The weekly shows a four year head and shoulders pattern traced out with an extended neckline arriving just below TLT $118 (in blue).
With the price sitting at $119.23, we could see a breakdown within days, if not less. The weekly 137 and 274 moving averages have peaked and are turning over, and both RSI and MACD are sub-waterline (in green).
The downside count for the formation would bring TLT to roughly 88.
In a word: perilous.
Pulling back to the monthly offers little cause for hope. As far as this chart is concerned, the long bond already has one foot in the grave.
Take a peek –
RSI has been bearish for five months already, and MACD confirmed just eight weeks ago (in green). But more signifcantly, we see that price has broken below a seven year trendline (in red), and without a sustained move higher – capturing the 122 mark and keeping it – the bull appears to be sunk.
Now, before you go soiling your blankie, consider that any downside move in the bond market could come about a) in an orderly fashion, or b) less so.
And that makes all the difference.
Because if the move is slow and steady, then we shouldn’t see much disruption in the commodity and equity spheres.
If there’s panic, however…
All bets are off.
Our own inclination is to bet on a long term retreat for TLT, one that plays out over at least a couple of years.
And we’re selecting our options accordingly.
But before we get there, we have one open trade to update.
The trade was opened on the 17th of April in a letter called Sit Down And Prepare For An Explosive Bull Movement. There, we urged you to buy the USO January 18th 15 PUT for $2.19 and sell the QQQ January 18th 125 PUT for $2.37. Total credit on the trade was $0.18.
And today? The USO PUT fetches $1.57 while QUBES goes for 1.25. Sell off the former and buy back the latter and you pocket $0.50 on precisely zippo laid out. That’s 233% in just four weeks (3029% annualized!).
And that tops sucking lemons overnight.
And now for our trade!
We’re going to go out as far as we can on this one. and let the trade unfold as slowly as it wants.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider selling the TLT January 17th (2020) 119 CALL for $6.65 and buying the TLT January 17th (2020) 119 PUT for $6.80. Total debit on the trade is $0.15.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew