The Top Trade for 2012

05/15/2012 3:00 pm EST

Focus: STRATEGIES

Larry Pesavento

Chief Investment Strategist, Trading Tutor

A strong first quarter could give way to strong downward bias for the rest of 2012, warns Larry Pesavento, who shares what he sees as the go-to trade for the remainder of this year.

We're here on the floor of The Traders Expo with Larry Pesavento talking about his outlook for 2012.  Here in the early part of 2012, what are you looking at?

At the beginning of the year, we were thinking that the stock market was going to rally relatively strongly into early March, possibly late March. But after we finished the month of April, we have a very strong trending cycle down through all the rest of the months of 2012 and all the way into January of 2013.

We feel that we have a really strong negative bias for the last three quarters of the year for 2012.

We're always seeing gas prices rise. Are you one of the ones that are predicting these higher gas or oil prices?

I don't really care where gas prices go. I'm interested in where crude oil is going to be on Tuesday or Wednesday. So what I try to do is just look at crude as a broad brush. We touched the $104 level and that set up a potential trade to $117. 

Above $117 a barrel, however, I think it will have difficulty because we believe the economy is turning down because of the things we see and the overall cycle. It's going to be hard for crude to make it above $117, in my opinion.

What's your favorite trade here for 2012? Is there one area?

Yes, there is one trade that I absolutely love and that's short Treasury bonds. Bonds have been in a bull market for 30 years, starting in October of 1981, when interest rates were 16% in Treasury bonds.

From that time, we're down to where Treasury bonds are yielding 2.6%. I ask a question, is there anybody you would loan money to for 30 years at 2.8%?

It's just at a point where all the cycles are completing. It's making a major butterfly pattern. It's just got everything there that you could possibly look for. 

Now the politicians might change, and Bernanke might artificially keep prices low, but if you go back to 1796 when they first started keeping records on interest rates, we've never had a period where interest rates stayed at the same level for more than 18 months.

People compare this to the Japanese economy, and you cannot do that because the demographics are different, the geographics are different, everything is different between Japan and the United States.

I should have said I would borrow money at that rate.

Oh yeah, you want to borrow money at that rate. In fact, this is the time to get a mortgage because they're going to lend you money at 3.5% for 30 years. I won't even loan my kids that money for that length of time!

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