Tuesday, March 9, 2010

It's All The Same Trade!

One of the frustrating aspects about this market environment is that all assets look like the same trade. Betting on equities is a bet against bonds or vice a versa, betting on bonds is a bet against equities. It is that simple. Consequently, using a tactical asset allocation strategy makes it hard to diversify away my risk as I end up being all in on essentially what has become the same trade.

From my perspective, one of the best places to park my money would be in Treasury bonds as the reward to risk is greatest. This can be seen in figure 1 a weekly chart of the i-shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT). The key pivot point at 89.38 is support, and a weekly close below this level would be lights out for TLT - expect much lower Treasury bond prices or higher yields. In addition to being close to support levels, the "smart money" or commercial traders from the Commitment of Traders data is bullish on bonds, and the "dumb money" or Market Vane Bullish Consensus is extremely bearish. It is within this context - low (and quantifiable) risk and betting with the "smart money" and against the "dumb money" - that I see this as the "better" trade. Despite the resistance overhead, I believe that TLT could make it to $98.

Figure 1. TLT/ weekly

The flip side to Treasury bond trade has become the equity trade. As we have chronicled over the past couple of weeks, this is the crowded trade. There are too many bulls. In addition, there are headwinds in the form of strong trends in 10 year Treasury yields, gold, and crude oil. In essence, to bet with the equity bulls, you have to ignore risks and jump into the market while holding your nose. You are buying high to sell higher. In my opinion, the best case scenario for the bulls would be a persistence of the trading range that we have been in for the past 5 months.

Only time will tell as the story unfolds, but from this perspective, the safer and better reward to risk trade is with Treasury bonds. We should have our answer soon enough.


D-man said...

Equity bull continues, no matter what; new highs on Russel, Nasdaq and soon on the S&P very likely. No there are not too many bulls; actually there are a lot of neutral people and oceans of liquidity from our government and FEDs friends around the world. Yes, volume is anemic, we're overbought, there are divergences, mutual cash funds are as low as 3.5% and stocks are more loved today than at 750 on S&P. Yet, the prices march higher; I think that for "lower first than move higher" you need to throw in the towel; the market wants something else. This thing will go much higher, probably as high as 1500 (very very expensive).

Twistback17 said...

Since the technicals point to a higher trend, it seems that alone makes it too obvious, which in essence assures a lower point of entry in the near term and profits for shorts.

Guy M. Lerner said...


You make good points (as always) and this past week's sentiment comments were written with some of your comments in mind that I should throw in the towel. I don't see the need to deviate from the data especially since the market is up a week or two in a row.

Once again, I am not looking at the equity markets from a light switch perspective of being all in or all out; but my equity exposure is the lowest it has been in 6 months. Risk is high and difficult to quantify because of the headwinds present.

Thus from a risk to reward out look Treasury Bonds or shorting the market or being more Dollar centric makes more sense. I have more margin for error and I can quantify when I will be wrong.

Anonymous said...

The problem with TLT this year has been that it is acting like a cheap stock nowadays: set up and then breakdown at the last moment. I've lost money on this sucker recently (I know that's ridiculous) and I don't trust it anymore!

Guy M. Lerner said...


My thoughts on TLT are similar, but ...

1) the set up is there
2) I lost a little bit of money in this as well and I am beginning to question whether lower yields are possible
3) I wish it were acting like a cheap stock -garbage in, garbage out