Equity Happy; Treasury Crappy (TLT,DIA,FCX,UUP,IYT)

Equity Happy; Treasury Crappy (TLT,DIA,FCX,UUP,IYT)

Equity Happy; Treasury Crappy (TLT,DIA,FCX,UUP,IYT)

We’ve been talking in more emphatic terms about the bond market lately, though not because we have anything new to say on the matter.

The message has been consistent for several years – that a grand selloff in Treasuries would funnel tremendous flows of cash into the equity market, precisely at the moment that U.S. stocks were perceived as the greatest possible investment holding of the last three centuries.

In other words, there’s a bullish equity bubble in the making that will eventually tear the buttocks from Ginger May Gorilla, while sending the bond market lower for potentially many years to come.


Our latest rantings, however, come at a time when the yield on the three year Treasury has come up even-steven with the yield on the S&P 500 (see below), an inflection point that could have a significant impact on the direction of both asset classes.

Here’s the way it looks graphically –

The last time the two met, the vectors were reversed, with a breakdown in Treasury yields creating an advantage for equities (red rectangle). That took place, of course, while the stock market was melting down, and nary a lad or lass could be found with the brass nads necessary to pony up and seize the tremendous yield then available on the S&P 500.

Since then, the story has been more or less predictable: bonds have yielded nothing, the S&P has offered 2%, and successive rounds of quantitative easing have assured capital gains to all who ventured the equity market.

And so markets rose.

But with today’s rising rate regimen, investors have been put on notice that with the so-called risk free rate of return from bonds commensurate with the dividend yield on stocks – and the advantage to bonds only getting bigger as time wears on – stocks may no longer be the only game in town.

So what do we do?

Throw in the towel on our stock portfolios?

And if so, when?

To date, a rush from stocks into bonds has not occurred. Nor do we expect it to.

On the other hand, the prospect of rising rates (and lower bond prices) has yet to put a significant dent in the desire to purchase and own Treasuries. Indeed, as an asset class, bonds have held their own despite the changing posture of the Fed.

So it remains debatable whether the top of the bond market is actually behind us.

So what’s the takeaway?

In short, we’re convinced that flows from the bond market to equities will accelerate in the years ahead. What’s not at all clear to us is when that process will begin, and what the rate of acceleration will be.

All we can say is that when the speed begins picking up in earnest, we’ll know that the end of all mother-splatter pop-shot bulls will be facing its end.

Have a look now at a long term technical breakdown of the bond market –

For forty years, interest rates have been in decline, offering tremendous gains to those who purchased the longest dated securities and either held or traded them.

What’s interesting, however, is that on a typical long-term chart, one would normally draw three fan-lines lower in order to detect a turning point for a security, yet here, we see a fourth fan-line emerging from the 1980 top through the peak in 2008 (#4).

And what does it mean?

Well, it’s likely that all the messing about on the part of the federal government played a key role in metastasizing the usual “three and out” pattern we see on a regular basis in the charting profession. Indeed, it appears an additional seven or so years were added to the bond bull via the Treasury and Federal Reserve’s dickering over the last decade.

And that’s very likely what accounted for our early call on the bond market top-out.

But we’re not here to complain.

Failing any further intervention – which is hard to imagine given the direction and values of the current administration – it appears yields are headed up, and prices down.

And that’s the battlefield we’re opting to conquer in this week’s trade.

But first, we have three open initiatives to shut down.

The first was launched on March 23rd in a letter called Turn Tide, Turn!, where we urged you to consider buying the TLT September 21st 123 CALL for $2.13 and selling three (3) TLT September 21st 129 CALLs for $0.76 each. Total credit on the trade was $0.15.

Today, the long 123 CALLs trade at $0.66, and we say dump ‘em and let the short CALLs wither. We see little chance of the long bond climbing so far before September.


On May 10th we wrote a letter called Broad Themes and Extremes, wherein we recommended selling the FCX August 17th 14 PUT for $0.52 and buying two (2) UUP December 21st 24 PUTs for $0.28 each. Your debit on the trade was $0.04.

And now? The long UUP PUTs are trading at $0.21 each, while the FCX PUT goes for $0.25. Sell the former, buy back the latter, and you step out with $0.13 0n $0.04 spent. That’s a triple bagger, friends. Hope you went in big.

Finally, just last week we suggested a transport bet that we’re no longer happy with. The letter was Wrap It Up And Ship Her Away, and the trade asked you to buy the IYT June 15th 195 CALL for $2.55 and sell the IYT June 15th 195 PUT for $4.20. Total credit on the trade was $1.65.

Today, the CALL goes for $2.40 and the PUT for $3.60. Sell the former and buy back the latter and you net $0.45 on nothing spent. Accounting for minimal commissions gives you a profit of 200% in just seven days!

And Now For The Grand Finale…

We’re going long-term this week with our massive rotation theme, using the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) for equities and the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) for bonds.

And it looks like this –

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

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!