Tuesday, February 2, 2010

To Risk Or Not To Risk

In many respects the current market environment can be broken down into a very simple construct: to risk or not to risk. To start this week, the risk trade is back on. Risk assets, such as stocks and commodities, are moving higher; safe haven assets, such as bonds and the Dollar, are moving lower. Last week, the risk trade was off. Safe haven assets outperformed as the risky assets went into a swoon.

From this perspective, the markets have yet to "figure out" if risk taking is warranted or not. Yes, equities have pulled back a bit and are now in bounce mode, but Treasury bonds are trading in a range, and the resolution of this trading range is likely to hold the key to the equity markets. Higher bond prices means that the risk trade is off; lower bond prices means that the risk trade is back on.

Let's look at a graphic example of what I am talking about. Figure 1 is a weekly chart of the i-Shares Lehman 20+ Year Treasury Bond Fund (symbol: TLT). Key pivot points are designated by the black dots within the yellow dots. What are key pivot points? Key pivot points are special pivot points as they are a pivot point low occurring at a time when investor sentiment towards an asset is bearish. Typically, these price levels are areas of buying or selling that result in either support or resistance.

Figure 1. TLT/ weekly

In a very basic sense, a weekly close above 93.94 is very bullish for Treasury bonds, and one should expect risk assets to be under pressure. A weekly close below 89.91 is bearish for bonds (i.e.,higher yields), and the risk trade is back on again.

From this perspective, the price action is constructive for higher bond prices. Those bullish technical tidbits include: 1) a double bottom; 2) a break of the black down sloping trend line (red down arrows) as formed by two pivot highs. A weekly close above 92.15 would be constructive for TLT, and a weekly close above 93.94 would be very bullish.

On the bearish side of the ledger, I would not get too worked up about lower bond prices until there is a break below 89.91. If this were to occur, it would likely result in much lower bond prices, and I would expect risk taking to be back in vogue.

Figure 2 is the the i-Share Lehman 7-10 Year Treasury Bond Fund (symbol: IEF). This bond ETF remains stuck within its range. Bullish technical tidbits include: 1) double bottom; 2) remains above key support at 89.79. A breakout and weekly close above the black down trend line and the 91.25 would be very bullish for IEF. A weekly close below 89.79 would suggest caution and weekly close below the double bottom at 88.62 would likely lead to much lower bond prices suggesting that the risk trade is back on.

Figure 2. IEF/ weekly

In summary, long term Treasury bonds remain range bound. A break of this trading range will provide clues as to the risk appetite seen in the markets.


Anonymous said...

Mr Lerner: I was not reading your blog six months ago, and I would be very interested to know (if you are prepared to divulge such information)whether you fully participated for the duration of the six-month rally, and what lead you stayed in (if you did). I believe I can trust you to give me a truthful answer. Thanks.

Anonymous said...

Sorry: should have been "what led you to stay in..."

Guy M. Lerner said...


Easy...and fair question

But several clarifications are in order: 1) I don't run a trading service but I do take great effort and pride in providing very precise, consistent and timely information and I feel I do it better than anybody out there!! (this doesn't mean I am always right); 2) I do a strategic asset allocation strategy so my exposure to US equities could have ranged from 100% to 20% over the past 6 months depending upon the number of positions and where we were in the cycle

1) from early March, 2009 to early May I was leveraged and long US equities; these would have been a basket of US ETFs and foreign developed ETF's; other positions would have been in emerging market ETF's and commodity based ETF's and a very large position in Treasury yields (i.e., TBT)

2) since august, the percentage of assets towards US equities has been between 20 and 40% of my portfolio; over this time I still continued to carry positions in commodity ETFs, foreign emerging and bonds

3) I also will supplement my longer term trades with shorter term plays as well --this may happen a dozen times a year

It is really hard to say; my money is working most of the time so that is "full participation" but being an asset allocator, I tend not to be fully invested in equities unless I have a reason to be

Personally, I did not beat the NAS in 2009 but I did beat the SP500 and Dow; but more importantly, I did it in such a way that my risk adjusted return was over 5 fold better than the S&P500....so when the major indices were down 20% plus in Jan and Feb, I had nary a pullback. For a buy and hold investor in 2009, you had to lose 25% to make 25%. I did 5 times better than that. Furthermore, I used very little leverage to achieve these returns and I had a very big position in bonds for a long time

If you would like more information on what I do and how I manage money for myself and clients, please send me an email with your particulars

Anonymous said...

Mr Lerner: Thanks very much for your full and detailed response. Impressive. I won't waste your time with talk of asset management--my account is way too small to interest you! All the best.

Ken said...

hi guy
even though i respect your analysis greatly, BUT i think "I feel I do it better than anybody out there!! " is probably a big call. check out all the great traders on investoridol.com
tim knight and gary commonsense are all great traders, and I have made ALOT of money just reading their blogs. they post very actionable info, just like you - for which I am always grateful. Thanks, and no I am not here to promote any one persons blog.

Guy M. Lerner said...


Fair point....I am always careful about touting myself as I know Mr. Market is very good about serving up a dose of humble pie.

"actionable" information is a good way to describe what I am after

Guy M. Lerner said...


I did check out investorsidol.com and I notice that this blog, the technical take, is prominently displayed there too....very nice