Out of Favor Trades: US Long-End Treasurys, Munis and USD

As I said in the yesterday's post, TA is broken, the stock market is broken, but those of us who still want to make money in the market can still look at the last remaining good TA signal - divergence. It has worked for me, most recently with ISRG.

I'm looking today at one of the three things that have been widely despised as close to worthless: US Treasuries, long-end. The chart is TLT, an ETF on Treasuries 20-years and longer. It is actually breaking down from the tight bollinger band, and whether it can snap back up from here remains to be seen. It has been pretty much in the lower bollinger band since late August/early September when Ben Bernank started QE Lite, and QE2 hasn't helped at all, contrary to what Ben said.

But what do I see in the chart? Positive divergence in MACD, and MACD histogram. RSI also has a slight positive divergence.


Checking on call options on TLT, I found a large volume on February $90 calls with the volume of 3677 with open interest of 1415. February $91 calls had the volume of 1862, but as a call spread it doesn't make sense. Checking the etrade intraday volume, the calls were being bought pretty much throughout the day for both strikes, not in one single purchase.

TLT ended Friday at $88.81.

The other one is US dollar, but I haven't seen the positive divergence on the chart yet, although it seem to sit at the point of "make or break". I think if the Obumbum's administration decides to do the American Homeland Investment Act Part Deux, it may be highly favorable to USD short-term. Combine that with the number of speculative short on USD in contrast to other currencies, and can we say "SQEEEZE"??

Munis are even more despised and hated, but it clearly shows positive divergence in MACD, RSI, and slow stochastics. See for yourself.

Do your own DD, and be safe. Although Ben's put seems eternal, if these three (Treasurys, munis, USD) dare follow the positive divergence and start going up, that may not mean well for his beloved stock market.

TBT While I Wasn't Particularly Looking

It has broken out of a symmetrical triangle it's been forming since October. It has even already backtested the upper line of the triangle, and it's now off to the races.

TBT is a double-short ETF on Treasuries 20-years and longer. It is a double-inverse of TLT. As those longer-dated Treasuries prices fall (thus their yields go up), TBT goes up.

There are even more leveraged inverse ETFs like triple-short 10-year Treasury (TYO) and triple-short 30-year Treasury (TMV) but they are very thinly traded for my liking.


It looks like I've missed the boat on this, but I think there's still some upside left on this leg. It can run up to $55 or so (target price derived from the height of the symmetrical triangle), where it meets a horizontal line that marks the previous resistance/support.

What's interesting to me is that TBT broke out and continues to go up, DESPITE the dollar strength (take a look at the top of the chart - that's US dollar movement). So, as I mentioned in the post a few days ago, the U.S. dollar "strength" doesn't mean investors are flocking to the U.S. dollar denominated "safety" assets like Treasuries. It is rather other currencies' weakness.

Longer-Term Treasuries' Yields Turn Sharply North

This is an intra-day chart comparing 5-year Treasury yield (^FVX), 10-year (^TNX), and 30-year (^TYX).

Standard & Poor downgraded the outlook on the United Kingdom from "stable" to "negative", and is threatening to downgrade UK 's credit rating (currently, surprisingly still AAA). Fear of "Will the US be next" is probably weighing on the stock market and the bond market (yes it is, says PIMCO's Bill Gross). Japan's credit rating is already cut from AAA.

Dow Jones Industrial is currently down 190, over 2%.

Things seems to be getting unhinged, again. (Mercury Retrograde in full force.)