February 17, 2011 - A Rest for the Treasury Bond Sell Off

Featured Trades: (THE TREASURY BOND SELL OFF), (TBT), (TLT)

2) A Rest for the Treasury Bond Sell Off. The Great Treasury Bond Sell Off, which has been running now for nearly six months, may be about to take a rest. Take a look at the chart below put out by my friends at StockCharts.com. It shows that the iShares Barclays 20+ Year Treasury Bond ETF (TLT), the single leveraged long ETF, is bouncing off the old resistance line that we saw on the upside last April.

One of the oldest and dustiest rules in any technical analyst's handbook is that old resistance usually becomes new support. You can't see the inverse on a chart of the double short bond ETF, the (TBT), because of the distorting effects of the heavy cost of carry has on the price, nearly 1% a month.

The other interesting thing about this chart is that it shows the perfect inverse correlation between stocks and bonds that has persisted for the past year. This is important because any near term support for bonds could also signal a top for stocks and an ensuing sell off.

There are a few other canaries in the coal mine that I am carefully monitoring. The imminent break in the yen could be signaling a broader change in the global markets. A weakening yen and a strong dollar might well trigger a flight to safety that could deliver broader selling across all asset classes. In this complex and interrelated world, the blow off tops we are seeing in the cotton and sugar markets may be substituting for similar moves we say in stocks in years past.

This is why my short term trading book is the lightest that it has been in a year. I am nursing small, but so far modestly losing shorts in the S&P 500, the yen, the euro against a long position in the volatility index (VIX). The slightest weakness in stocks, and this entire book lurches into the green, big time.

It is all part of the three dimensional chess game we call 'global macro', the great 10,000 piece jigsaw puzzle. Since I have been at this for 40 years, and spent considerable time working in every major securities and commodities market on the planet, I tend to see these sea changes earlier than most. I just thought you'd like to know.

It's Your Move, Mr. Market

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