Treasury bonds prices are all the rage right now, but as confirmed in the weekly 20+ Year Treasury Bond Fund chart below (TLT), prices began rising last July advancing 33% over the next two months. And as seen in the chart, after consolidating for the next five months, prices jumped 18% off the bottom of the trading range culminating in a 41% advance since last summer. The price surge caught most analysts by surprise as people speculated whether anyone would lend to a deeply debt ridden country. The answer is the good old US of A is the dog with the least fleas. Even if all the dogs are in the same kennel and they all may eventually be contaminated, at this point the other canines are scratching a lot more than we are.
The Treasury bond fund rose to a new all-time high this week and the weekly chart above confirms how the recent price move has been straight up. Bonds could move higher, but expect a consolidation period to relieve overbought conditions. Taking a look at interest rates (which of course moves in the opposite direction from bonds) the 10 Year Treasury Note Yield daily chart below ($TNX) confirms that yields sank to all-time lows last week. The money flowing out of the stock market and into bonds is driving the interest rates lower as traders seek a safe haven due to a weakening global economy and the expectation of a possible further round of quantitative easing (QE).
Compare the 10 Year Treasury Note Yield chart above with the S&P 500 Large Cap Index chart below ($SPX). As you can see, treasury yields and the S&P 500 are moving in tandem. This is a bad omen for the stock market as it reflects the perception that the U.S. economy is slowing down and increasing the likelihood of a 'double dip'. Further confirmation of the 'risk-off' trade is reflected in the fact that the utility sector is the leading performer among the equity categories. Falling bond yields and the strong relative performance of utilities is an obvious sign that investors are risk adverse and this mentality is leading to the lower stock prices. Also, commodity prices are correlated with bond yields and stock prices as falling commodity prices suggest global economic weakness.
Traders are starting to expect (hope) for another round of QE and are begging Ben Bernanke & Co. to respond sooner than later. But ultimately, Federal Reserve intervention is not the long term solution to U.S. economic problems and it can be argued that certain Fed action is a contributing factor. Former Fed Chairman Alan Greenspan started stimulating the economy during the Clinton Administration with reduced interest rates that inflated asset prices and led to one bubble after the next. Ben Bernanke has continued the trend and traders now appear to be addicted to artificial stimulus and withdrawal symptoms lead to recession. And just like an addict, it takes more and more stimulus to keep the recipients happy.
SPY Position Update
SPY closed at $128.16 on Friday â€“ the June position is approx. $1,200 in the red
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is priced BELOW its 50-day simple moving average (see SPY chart)
SPY is just ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is oversold (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The May 15th Couch Potato published a June expiration SPY bull put spread
The put spread is approx. $1,200 in the red (see tables below)
$126 strike price short put delta is -.3203 (68% probability this position will be profitable)
SPY Risk Analysis
The S&P 500 index is officially in correction mode down 10% from its April 2nd 52-week intraday high and off 9.9% from the 52-week closing high the same day. If the correction continues the risk is prices continuing to drop and threatening the June $126 strike price short put.
TLT Position Update ---------------------------------------------------------
TLT closed at $123.40 on Friday â€“ the June position is approx $3,500 in the red
TLT is priced ABOVE its current 14-day EMA (see TLT chart down below)
TLT is trading ABOVE its 20-day Bollinger Band SMA (see TLT chart)
TLT is priced ABOVE its 50-day simple moving average (see TLT chart)
TLT is ABOVE its 200-day simple moving average (see TLT chart)
Relative Strength Indicator (RSI) is extremely overbought (See TLT chart)
Moving Average Convergence/Divergence (MACD) is bullish (See TLT chart)
The May 22nd Couch Potato published a June expiration TLT bear call spread.
The call spread is approx. $3,500 in the red (see tables below)
$126 strike price short put delta is .6697 (33% probability this position will be profitable)
TLT Risk Analysis
The Treasury bond asset bubble has triggered the exit rule for our TLT short call. Fortunately, there is plenty of time to adjust the trade to minimize the potential loss.
As mentioned above the TLT short call exit rule has been triggered and over the next few days we plan on adjusting the trade. The bond fund is grossly overbought and will have to consolidate, but we to trade what is in front of us right now.
If the SPY short strike is penetrated (closing price below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price.
The May 27th Couch Potato Market Summary mentioned "...Similar to what happened last August when stocks were extremely oversold, prices are settling near a support level. As noted in the chart, for the S&P 500, its 200-day SMA intersects the lower Bollinger band and appears to be acting as firm support. And there is significant overhead resistance which suggests that similar to last August, prices can be expected to trade range bound for awhile. The current price pause is basically just alleviating oversold conditions. We will probably get a 'dead cat' bounce here and there, but it is reasonable to expect further downward pressure before prices move much higher..." As confirmed in the updated chart below, the S&P 500 index closed just below its 200-day SMA and we should find out over the next few days whether this support level will hold.
Recent Couch Potato articles have discussed how the current price action for most of the major indexes closely resembles how stocks behaved last year, and for most of the same reasons (e.g. Euro-debt crisis, slowing U.S. and global economy, etc.) Also, past articles suggested a rationale for stocks avoiding the mid-year crash similar to 2011 â€“ e.g. election year politicking as neither political party wants to risk being blamed for an economic collapse, aggressive Fed stimulus, and statistics supporting presidential election year market gains etc. But, as we have advocated in the past, it is usually best to trade we you see, not what you want. As analyzed in the Market Summary above and indicated in the chart below, at this point we see the major indexes playing out similar to last year AND the year 2010 (in the chart below compare April to June of last year with this year). Volatility has surged as stocks are generating triple digit daily moves and the DOW just experienced its worst performing month in 2 years. Whether current support holds or prices move lower, expect a choppy ride for the near term and we will plan our trades accordingly
Keep in mind the stock market tends to move in the direction that inflicts the most pain on the majority of the people. All market trends change and the current trend will probably change when it gets the highest number of folks committed to the bearish move â€“ this could happen next week or next month, but it is going to occur. If we trade with the probabilities on our side based on what the technical chart indicators are saying about the current behavior of buyers and sellers, plus hedge our bets, then favorable price moves will be profitable while unfavorable moves are manageable.
Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.