Trade Idea: Short When TLT Shows Strength

10/13/2017 4:09 pm EST

Focus: STOCKS

Landon Whaley

Editor, Focus Market Trader

Trade idea: As long as TLT trades below $129.57, then you can consider new short positions when TLT shows strength. Depending on your entry price and how much room you want to move, use a risk price between $126.93-$129.57, suggests Landon Whaley of Focus Market Trader.


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The iShares Barclays 20+ Year Treasury Bond ETF (TLT) gained 1.8% in the week ending October 13, but still has gained 5.6% for the year.

Last week was a case study in the importance of staying data-dependent and not being swayed by groupthink narrative. The Fed released the minutes from its September meeting, and the market instantly interpreted them as dovish.

The statement investors were preoccupied with was: “in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective.”


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There are two primary issues with leaning dovish based on this one particular statement or the entirety of the Fed’s minutes.

First, these minutes were recorded before Yellen’s comments in Cleveland. Ohio. Remember, she said, “[There are] considerable odds that inflation won’t stabilize at 2% over the next few years,” and “[it] would be imprudent to leave rates on hold until inflation reaches 2%.” Yellen has already acknowledged that low inflation will not deter the Fed from moving forward with either a rate hike or a reduction in its balance sheet.

The second issue is that the U.S. dollar and 10-year yields are not the right markets to watch if you want to get a read on Fed policy. The most reliable markets to watch are the Fed fund futures and the two-year Treasury yield. Both markets reacted hawkishly to the Fed minutes, which indicates the market is still pricing in a December rate hike.

The bottom line is the 3-headed U.S. hydra economic environment is firmly intact, which means the playbook remains the same. One of those plays is to opportunistically short long-dated U.S. Treasuries.

Trade idea:

As long as TLT trades below $129.57, then you can consider new short positions when TLT shows strength. Depending on your entry price and how much room you want this trade idea to move, use a risk price between $126.93 and $129.57

chart

Once initiated, close all open trade ideas if TLT opens, or closes, above your risk price. That said, your risk price “line in the sand” is that $129.57 level. If TLT trades above that price, even for a second, then promptly close all open trades.

If this short trade moves in your favor, then you could consider using the area between $123.10 and $120.84 as your spot to take profits on some or all your position.

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