ProShares UltraShort Lehman 20+ Yr(ETF) (NYSEARCA:TBT) Has Been Attractive

June 05, 2014, 09:00 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The equity market has been diverging from the bond market for quite some time and investors are curious, while traders take advantage of the situation.  But the rationale for this divergence is clear to anyone who understands the macro economic conditions of the underlying economy, the one that exists without FOMC stimulus, but that doesn't change the opportunistic environment that extended moves create.

To this I'm speaking directly to the extended move in the bond market recently.  The long-term U.S. Treasury bond has been rallying while the stock market makes all time highs.  My argument for this divergence is the deteriorating state of the US economy on a naturalized basis as that is defined by the Investment Rate, and eventually I believe that the stock market will reflect the risks that the bond market is already warning us about, but again, trading opportunities can surface, and in both directions.

Although the underlying macro economic conditions are deteriorating and although there are serious risks that the bond market, which is largely comprised of long-term investors who are much more diligent in their research, is warning us about, our observations also suggested that the bond market had increased more than it should have.

In no way does this imply that the bond market is going to crumble, in fact our combined analysis suggests that bonds may still be in high demand as the progression towards the natural state of the economy continues and the Net Real Stimulus (NRS) offered by the combined efforts of the Federal reserve and the U.S. treasury continue to drain liquidity from the economy, but immediately and in conjunction with opportunistic trading signals, the short side of the long-term U.S. treasury bond has been appealing.

Specifically, last Thursday the ProShares UltraShort Lehman 20+ Yr(ETF) (NYSEARCA:TBT) tested the longer term support level we identified in our real time trading report for TBT.  At the same time, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT), which is not double waited, also tested the resistance level that we offer in our real time trading report for TLT.  This told us that not only have the long-term U.S. Treasury bond tested a level of resistance, but so did the double short ETF for the long-term U.S. Treasury bond test its respective support level too.

This presented an opportunity to trade the long-term U.S. Treasury bond short from last Friday.  Since then, T BT is up about 5%, which is a very nice short term gain, and directly in line with our objective for the trade.  We recognized that an exaggeration happened, we recognized tests of resistance and support in these ETFs as well, and those were trading catalysts that influenced the decision to short the long-term U.S. Treasury bond for the past few days.

Immediately, we have a profit stop in this position, but we are holding it.  At any time that profit stop could trigger and we could be out of this position, but we are holding nice gains and we are not being greedy.  The underlying macro economic conditions suggest that risks are high, the bond market has historically been much smarter than the stock market, and Net Real Stimulus (NRS) is already net negative and set to become even more of a drain on liquidity in the Financial System, and we believe the divergence between the stock market and the bond market in recent weeks reflects the Financial Community's perception of risk as that relates directly to overall liquidity concerns.

Fathomably, we would not be opposed to switching from short to long again when the time is right.

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