TBT Movement Means?

TBT vs Gold (GLD) US Dollar (UUP) and some "foreign exchange"

TBT vs Gold (GLD) US Dollar (UUP) and some "foreign exchange"

For a while now I’ve been saying it was time to be in TBT (and by implication, out of bonds). On Friday, TBT took a nice jump. How nice can be seen in this graph.

As it is based on the US Treasuries, it tends to move over long periods of time (as the Fed changes directions) and at odd times (as Treasury Auctions happen or as folks do various things globally … like invade countries).

One of the questions to be asked when it makes a jump, like this one, is “Where is the money going?”. Are folks selling bonds? Then they are putting the money into something else. Another currency, perhaps, or gold or ????

So this chart looks at the major currencies and gold (and the UUP US Dollar UP fund) to see if something else moved up. And nothing did.

This is not a run from the US Dollar to Yen, or Swiss Francs, or Gold….

At this point, there are two possibles. Someone needed to dump bonds to fund some activities and it’s not shown up in the data yet (i.e. they have not bought the Yen or Francs or… yet) or it was simply that there were very few buyers showing up for bonds. It is also possible that the buyer was not using one of the major reserve currencies. For example, if Egypt were cashing in a load of US Treasuries for US Dollars then using them to prop up the Egyptian Pound, you would see it in the Egyptian Pound, but not in the Yen… nor would it show in the US Dollar / Yen / Euro crosses…

So what I see in this chart is a general slide of the US Dollar (UUP) fund, but not a large climb in the other currencies, and the move of the dollar on the “spike” day is not correlated.

There is a general move out of US Dollars and into other assets (that we need to find…) but it’s not just a run from the dollar to other currencies. More likely it’s an “assett allocation” away from bonds. This next chart looks at some semi-random choices of “country funds” and finds Australia having the most corrolated rise in that tail bit (but all of them rising).

To me that says the “Short bonds, long stocks” thesis is dominate right now.

TBT vs various Country Funds

TBT vs various Country Funds

TBT – Bond “shorting” fund
SPY – S&P 500
QQQQ – Nasdaq 100
EWW – Mexico
EWC – Canada
EWA – Australia
EWQ – France

All of which leaves me to wonder if “The time to buy is when blood is running in the streets” is being applied to Australian assets?

I also note a more general allocation toward France who will gain some competative advantage from their nuclear power base as oil rises over $100 / bbl in Europe.

Clearly I need to do a broader “WSW” type “look around”, but for now, the trend is “short bonds / long stocks”. Not on the chart, but a “teaser”: RSX – Russia is moving up nicely. Gee… who owns oil…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , . Bookmark the permalink.

6 Responses to TBT Movement Means?

  1. TGSG says:

    maybe they bought a bag of rice?

  2. E.M.Smith says:

    @TGSG:

    Yeah, commodities are moving. Have been for a while (and likely to continue for a bit too; though I’d expect some goverments to be getting worried… and trying various ‘price stabilizations’ soon).

    Sugar, corn, wheat, rice, whatever. All on a run.

    I suppose one possible would be China dumping some bonds to buy a load of grain contracts…

  3. KevinM says:

    “Clearly I need to do a broader “WSW” type “look around”, but for now, the trend is “short bonds / long stocks”.”

    Waiting on edge of seat. Infollowed the TBT rec.

  4. KevinM says:

    Oh well, it was fun while it lasted. I’ll get stopped out at 40, where it was when you first suggested.

    Bernanke saying today that the expansion of the Fed balance sheet is not permanent could only mean the worlds largest holder of treasuries is planning to eventually sell.

    If anyone listened to or trusted him TBT should have done well.

    I’ve started to cut down my UPRO exposure, which has been great since October. It was refreshing to be on the right side for a while after riding SPXU a good ways in the wrong direction.

    Not sure where to go next. Thinking about hiding in all cash for a few months. Oportunity cost feels cheap.

  5. George says:

    The mortgage markets are still sick. The Fed can not allow interest rates to rise too much lest it risk another wave of foreclosures. There are a large number of 5yr ARM mortgages expiring in 2011 (the ones let in 2006, the top of the market) and a significant rise in interest rates right now would put what is already a difficult refi market into “impossible” territory. 2011 will be the worst of it for the mortgage markets. The major financial institutions still have a lot of money tied up in mortgages and anything the fed can do to stabilize that market is welcome from that perspective.

    BUT, once that slug of mortgages is done, watch out. The Fed is going to have to release the hold on rates at some point. My guess is that they will do it gradually, slowly reducing the amount of treasury debt they are monetizing and allow rates to creep up to attract traditional buyers for the rest of it.

    How much the fed will be able to dump on the open market will depend on what interest rates do. If rates jump quickly, they won’t be able to sell much as that will simply act to push rates even higher (if there is more treasury debt on the market than people want to buy, the price if it goes down meaning the interest rate goes up). They might just end up holding a lot of that debt to maturity. I am not sure of the maturity mix of the debt they have bought, though, and I don’t think they are telling. The point is that they get the money back even if they do nothing.

  6. E.M.Smith says:

    @KevinM

    Um, I first “recommended” TBT a couple of months ago…

    Yesterday (or the day before?) on Fast Money there was a trader advocating a ‘counter trend trade’ of long TLT (i.e. the opposite of TBT).

    That makes sense as the TBT ticker is far from the SMA stack (so the inevitable reversion to the mean will pull it down or the averages up). That that was to be a very short term trade using options.

    I’m in TBT for a longer term cycle (the eventual Fed Raising Rates cycle) so I’m in about 1/4 of a position now and I’ll increase it on any pullbacks.

    One of my key points (and one I’ve not emphasized lately) is that as prices are fractal you MUST pick your time scale. The right action for a 1 year time horizon may well be exactly wrong on a 2 day time scale.

    So, for example, I would say that over a 5 year time scale bonds are “toast”. The Fed MUST raise rates eventually, and by a lot.

    Over 1 year I think it will also be hard for The Fed to hold bond prices steady even without changing rates. Too many folks are onto the game.

    In a 1 week time period, I’d expect Reversion To The Mean to bring TBT back down to the SMA stack. Tomorrow, I expect both higher and lower at various times during the day with different trends at the same time on the 1 minute, 1 hour, and 5 hour scales.

    This is a Very Important Point. It explains why two seemingly equally good and correct traders can have exactly oppostite views of what bet to place. They are looking at different time scales.

    So, several months back, I said be getting out of bonds. A couple of months back, I said TBT is your friend (and likely will be for a few years). Both were right on a ‘several months’ time scale. Both were both right and wrong at different times on a “day trader” time scale. Both were completely wrong on a decade time scale (as the last decade was a great one for bonds compared to stocks).

    I tend to post with a ‘few months’ time scale.

    Not always, but typically. Folks wanting “day trades” need to watch the charts themselves. Sometimes I’ll have a 10 day hourly chart, just so folks can see what it looks like or for timing the entry into a trade, but not typically. If you want to day trade, use a chart like this one:

    http://bigcharts.marketwatch.com/charts/big.chart?symb=tbt&compidx=aaaaa%3A0&ma=4&maval=12&uf=8&lf=2&lf2=4&lf3=1024&type=4&size=3&state=15&sid=3189241&style=320&time=18&freq=8&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=2106&mocktick=1

    Notice that (as I type this… it’s a live chart so will change) there was RSI at 80 about 4 days ago (meaning ‘near a top’ soon) and MACD had a crossover to the downside 3 day ago signallying a ‘day trade out now’ later confirmed by DMI going “red on top’.

    So were I day trading TBT, I’d have gotten ready to exit last Friday and been stopped out mid day Monday. At this point I’d be waiting for a day trade ‘reentry’ which would likely be next week some time.

    (BTW, at the bottom of each WSW posting, or maybe at the top, is a link to a “picking an entry point” posting. Just because I say FOO is going up, that does NOT mean “buy it today”, it means “follow the guidance in the ‘picking an entry point page’ before buying”. )

    The simple fact is that The Fed can’t sell treasuries in excess right now as China is buying all it wants of the new stuff. And The Fed can’t buy Treasuries in an infinite quantity either. They are in a hard place…

    So interest rates have been rising despite all they could do that is supposed to be making rates fall. So they can’t even just stop…

    For this reason, TBT will be your friend for a few years to come…

    But yes, you can day trade it on ripples that run a week or so in duration driven by news events and Fed purchases…

    @George:

    I’d expect their first act would simply be to stop buying short term notes and let what they hold run off.

    Right now the yield curve is about the steepest ever. If you see that starting to flatten, hold on to your hat… they have stopped buying the short term stuff and the run off has begun…

    IMHO the game they are playing right now is to buy distressed mortgages at the long end and short term bonds / notes at that short end to seepen the yield curve (and thus help all the banks). As soon as they think they are “done”, I’d expect that curve to flatten and the short end to rise the most.

    I’d give it about a year. Maybe less (we’d need to hear some big hiring numbers for it to be sooner… and that isn’t happening right now.)

    And that is why I’m in TBT ‘longer term’ (probably longer than the ETF instrument really justifies. I ought to be directly shorting Treasuries…)

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