In certain aggressive managed accounts, we have been nibbling on some TBT, the inverse 20 year treasury ETF. Data such as the AAII Asset Allocation Survey show investors are very overweight bonds relative to their 27 year mean.  Additionally, the multi-decade drop in interest rates suggests we are likely at a secular low, and ready to embark on a long cycle of rising rates.

Looking at TBT, we see a technical base building, which looks so inviting. As they say in our industry, it looks so good it makes you “want to back up the truck !”  On paper it’s a perfect set up: a long death decline, from $ 300 in 2008 to a low of $56.32 on July 25th 2012, exhausts and frustrates even the most ardent TBT holder into capitulation.  With most of the owners flushed out of TBT, or at minimum uninterested after being “long and wrong”  for so long, shares subsequently have built a beautiful 7 month base. Throw in all the rational and widely assumed fundamental reasons why Treasuries should correct, and instruments like TBT should rock and roll.

So after stating all the aforementioned points, you’ll be surprised that we are rethinking our small long commitment in TBT.  Why ?

1.   It’s too obvious to everyone: The old saying the “market exists to confound the majority and reward the minority” exists for a reason.  Typically, when everyone thinks they have it figured out and it seems so easy and logical – it just doesn’t work.  Markets don’t just shower riches on the masses.  It’s just never that easy.  Markets reward intelligent and diligent thinkers and tacticians.  Right now EVERYONE thinks bods will top – so we suggest the maybe the market won’t be so accommodating !

2.   Setting up to breakout – and breaking out – are two different things:  While that TBT base looks very enticing, we have seen many promising bases fail at the upper end of their range, then slip and fall back into the base again.  We all have selective memories of these great breakouts, the kind that bust out and never look back. The reality, however, is those type of breakouts are the minority.  The $ 69.25 – $ 70.00 level on TBT has been a sticking point for a while now.  We will call it a breakout when those levels are eclipsed.  For now, its all potential … and “potential” has gotten many an NFL executive to bite on first round QB’s that can’t cut it !

3.   Monster spike in Google Trends for TBT: While not scientific, we find the chart below from Google Trends very interesting from a sentiment perspective.  As illustrated below, the amount of interest in TBT, as demonstrated by Google searches for TBT, have exploded to an 8 year high as of yesterday.  This clearly supports our 1st point: everyone is sniffing around this trade, and we just don’t see the market rewarding everyone, as she’s just not that kind !

google trends

Click chart to see larger image

So while the TBT chart below shows a potentially compelling technical bottom, and fundamental evidence to support the trade is plentiful, TBT has been repelled at resistance again, and slipped lower as bond yields moderated.  While we believe ultimately this is the correct trade to make, the timing just may be off, however, as too many people are sniffing the trade.  Thus, shares may skip or base for several months longer to get investors uninterested again.

This trade will remain on our radar as we are setting alerts in our FusionIQ software system to alert us to TBT > $ 70.00, coupled with a new FusionIQ Buy signal.

Ultrashort 20 Year Treasury (TBT) – Daily Chart

As seen below TBT shares are still below key resistance near $ 70.00 (red line).  Only above $ 70.00 will TBT truly have broken out and turned the corner. Until then, the seduction of the breakout will be the lure.


Click Chart To See Larger Image



Category: Contrary Indicators, Fixed Income/Interest Rates, Think Tank

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3 Responses to “Rug to be pulled out from under the short bonds trade ?”

  1. blinblin says:

    I completely agree with your analysis and think the correct side of this trade is to be short TBT.
    Interestingly enough, judging from the lack of comments, others don’t seem to agree with you or simply don’t care.

  2. boveri says:

    “Monster spike in Google Trends for TBT” A just amazing stat that needs to be paid attention.

  3. Bjørn says:

    Searching trends for “TBT ETF” removes the wheat from the chaff. It tells an entirely different story. Reconsider???