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Top Picks 2017: ProShares UltraShort 20&#43 Year Treasury ETF

01/25/2017 6:00 am EST

Focus: ETFs

Landon Whaley

Editor, Gravitational Edge

I don’t know if the bull market in bonds is over or not, and nor do I care. I’m not in the business of playing Captain Prediction. I trade the markets that are in front of me, using my data-dependent 3G investing framework, explains Landon Whaley, editor of The Whaley Report.

As we begin 2017, all three gravities -- fundamental, quantitative, and behavioral -- are signaling that long-dated U.S. Treasuries will be one of the best short opportunities of the next year.

Because it moves in the opposite direction of long-dated Treasuries and it’s leveraged, the ProShares UltraShort 20+ Year Treasury ETF (TBT) will be one of the best-performing fixed income ETFs in 2017.

Fundamentally, U.S. Treasuries are facing a three-headed hydra, with U.S. growth accelerating alongside a stronger U.S. dollar and U.S. yields that are on the come.

The last time this hydra showed itself was during 2013, when long-dated Treasuries lost approximately 14% in nine months, while TBT gained 19%.

Quantitatively, TBT has been rallying for six months, and has cleared four critical levels of resistance, leaving nothing but clear skies for it to rise another 30%.

More importantly, TBT is exhibiting the bullish trifecta of price and volume rising while volatility is falling. From a quantitative perspective, it doesn’t get more bullish than that!

Behaviorally, speculators are already leaning short as they recognize the same trade set-up that I see, but that’s not concerning for two reasons.

First, the number of short positions could triple and still be lower than levels we saw just seven months ago.

Second, long contracts are almost two standard deviations above their historic norms. Anytime positioning gets this out of whack there is bound to be a reversion.

When these long positions eventually capitulate, it will simply add more gravity to a market already in decline and provide a nice tailwind for our TBT trade idea.

Again, to play this trade idea, use the ProShares UltraShort 20+ Year Treasury ETF. It’s one of the most actively traded ETFs, so it provides ample liquidity.

I’m fully expecting a countertrend rally in U.S. Treasuries to start the year, so don’t be alarmed if TBT trades down to the $38.00–$34.00 range before it starts grinding higher again.

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Editor's Note: Last year, Landon Whaley picked the Market Vectors Gold Miners ETF (GDX), which rose 51%. He now says, "I fully expect a countertrend rally in gold and gold miners to start the year. But after January, I think gold will perform poorly this year. The countertrend rally could push GDX as high as the $23.25-$24.50 area before the next leg down. I would sell any strength in GDX above the $22.50 price level."

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