Saturday, June 18, 2011

I Could See Shorting Long-Term U.S. Government Bonds Here

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After picking on U.S. government bond perma-bears a few week ago, I have to admit that shorting long-term U.S. government debt as a trade looks good here. Notice I did not say as an investment, but as a trade. Even though everyone said it wouldn't happen (and one day, it won't), the herd once again instinctively jumped out of the frying pan and into the fire of government debt when stock markets tanked.

Here is an 18 month daily chart of the yield on the 30 year U.S. government bond ($TYX) with my thoughts:

The fact that 30 year yields won't go any lower despite the fear in the equities markets is important in my opinion. A short-term bottom in long-term yields should correspond nicely with the "risk on" trade returning. By the way, I won't be taking this "short government bonds" trade, as I think there are better opportunities out there. I am looking for a nice rally in risk assets over the next month or so. Common stocks as well as the precious metals patch and commodities should all have a nice relief rally. This will get the herd out of bonds and back into chasing performance. Of course, I think this is all likely part of a topping process in global equity markets, but these things have a habit of taking longer than seems possible.

And why do I think a relief rally is coming? A few important data points. First, we got a pop in the $VIX into the mid-20s. Next, the percent of stocks below their 50 day moving average is now at levels that have marked previous bottoms during bull markets. Finally, the equity put-to-call ratio is off the charts bearish and screaming for a short squeeze higher in the stock market. Here's a 6 year daily chart of the equity only put-to-call ratio ($CPCE), using the exponential 10 day moving average to avoid the "noisiness" of the raw daily data:

It's rally time in risk assets in my opinion. Additional important data and specific trading recommendations are reserved for subscribers. Join us!

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