Monday, November 11, 2013

Treasuries are Looking Like A Short

The US treasury market has been slightly off for the last few years, largely because of one large buyer: the Fed.  The central bank's bond purchases have put a continual bid in the market, thereby keeping prices are elevated levels.  However, the charts are telling us the market thinks the Fed is a bit closer to getting out of the bond buying business, which tells us it's time to short the market.  Let's take a look at the charts:

On the daily chart, we see the May-September sell-off which was caused by the Fed stating it was going to begin to taper it's bond buying program.  During this sell-off, the market lost a little over 9%.  But from September to the beginning of November a small rally occurred.  There are two reasons for this.  First, we have a natural counter-rally to the sell-off, as some traders thought the sell-off was overdone and subsequently buy at what they perceive to be as value levels.  At the same time, some of the overall economic numbers were printing at weak levels, which implied the Fed wouldn't be tapering as soon as thought.  

However, last week we had two important reports: GDP printed at 2.8% and the employment report printed at a little over 200,000 jobs created.  This indicated the economy had withstood the shutdown in fairly decent shape, which implies the underlying economy is in fact far stronger than anticipated.  As a result, the IEFs broke their short-term trend line from the September-early November rally.

Just as importantly, the weekly charts shows that prices have broken a weekly trend line as well. 

These charts are all saying the same thing: if you're going to short treasuries, now's the time.