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Trade Idea: Short LQD Corporate Bond ETF

12/04/2017 1:54 pm EST

Focus: ETFS

Landon Whaley

Editor, Gravitational Edge

Trade idea: As long as LQD trades below $122.60, then new short trade ideas can be initiated between $119.98 and $121.56. Depending on how much room you want this idea to move, use a risk price between $121.78 and $122.60, suggests Landon Whaley of Focus Market Trader.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) declined 39 basis points in the week ending December 1, but still holds a 5.8% for the year.

I’m not usually a fan of Wall Street research but last week Morgan Stanley s trategist Adam Richmond put out a good piece on the credit market entitled “When the Levee Breaks.”

He draws our attention to the fact that monetary policy has been “massive” since the crisis, which has provided an extremely conducive environment for credit markets. The problem is that the “Fed is now tightening in an untested way, through the balance sheet, while also pushing rates near restrictive territory. Markets expect a seamless unwind. We do not.”

He goes on to point out that credit markets have experienced two straight years of positive excess returns but it’s been more than two decades since they have put together a streak of three straight years.

The bearish catalysts are stacking up for corporate credit, I’m sticking with the short bias and back with a new short trade idea for LQD.

Trade idea

As long as LQD trades below $122.60, then new short trade ideas can be initiated between $119.98 and $121.56. Depending on how much room you want this trade idea to move, use a risk price between $121.78 and $122.60.

Your risk price line in the sand is $122.60, if LQD touches that price, even for a second, then you should exit any open trades.

If the trade moves in your favor, then you could consider using the price range between $118.87 and $118.33 as your profit target.

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