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Halloween Is NOT Over

Bonds are scary now

Did you really think Halloween was over? Well, scariness extended into Monday with the appearance of the “Death Cross” on the weekly chart of a popular Treasury bond ETF. Short- and medium-term sentiment in the iShares 20+ Year Treasury Bond ETF (NYSE Arca: TLT) turned bearish when the fund’s 13-week exponential moving average (EMA) fell below the 34-week indicator for the first time since January.

Exponential moving averages differ from simple moving averages (SMAs) because EMAs weight recent price activity more heavily. SMAs give the past and recent data the same effect. EMAs are thus more sensitive to sentiment swings than SMAs.


Given the post-election tumult, it’s really no wonder the cross appeared. But there were signs before Election Day of weakness in the bond market. Specifically, there was a failure to hold a key support level in the daily chart back in early October. 

Okay, so no news there. Where are bonds headed now?

Um, lower?

If you peer closely at TLT’s chart, you might see a downside objective at the $104 level because of that October breakdown. That’s some $17, or 14 percent, below today’s price. That’s not likely to happen tomorrow or next week or perhaps even next month, but it’s a real likelihood in the near future.

Now, look at the chart again. You’ll see price trends usually take time to develop. Typically, there are bumps and pitches along the way. We should expect no less from this market, despite the steep post-election selloff. That means there’s time and opportunities for longs to exit and for shorts to enter.

If you’re looking to capitalize on the reversal of bonds’ fortunes without venturing into futures, you could consider the ProShares UltraShort 20+ Treasury ETF (NYSE Arca: TBT), an index tracker that aims to deliver twice the inverse (-200 percent) daily performance of long bonds. TBT’s gained $8 already since the October break to attain a short-term bullish objective near $40. TBT appreciated 25 percent while TLT slumped by $14, or 10 percent.

Given our TLT forecast, could the inverse fund pull off another 25-percenter? Well, maybe.

The thing about these levered funds is that they track the daily performance of their target markets. When a market, like bonds, experience an uninterrupted streak of losses, the returns of levered inverse ETFs are magnified by compounding. Appreciation is attenuated by intermittent “up” days. No one should reasonably expect another swift downdraft like that seen in the wake of the election, but the odds are still in favor of TBT. Certainly more so than TLT. 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

TAGS: Fixed Income
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