Why I?m Selling Short Treasury Bonds

This has really been one of those incredible, jaw dropping, knock your socks off kind of years. It seems like every asset class is doing exactly the opposite of what it should do.

A slowing economy delivered a huge move up in bonds, which is fine. The extent of the damage the harsh winter wrought on the economy was confirmed this morning, with a full one-point drop in Q1 GDP. But does this mean that stocks should go to all time highs as well?

Look at the volatility index, (VIX) (VXX), which is also sitting at multiyear lows. You would expect it to rise as we go into a traditional ?RISK OFF? season. It does truly seem that this time it?s different.

That is, until they are not different anymore. I believe that after five months of markets that are unpredictable, extraordinary, and difficult to trade, they are about to become predictable, ordinary, and easier to trade.

What does that mean for you and me? Buy stocks and sell bonds. We are about to shift from a reach for yield world to one where investors are reaching for capital gains. There isn?t much yield to reach for anyway.

We?ve just had a four point run in the latest leg up in the incredible bull market in bonds. So I am strapping on here the iShares Barclay 20+ Year Treasury Bond Fund (TLT) July, 2014 $118-$121 in-the-money bear put spread (see yesterday?s Trade Alert).

We could be in for some month end profit taking. The upper $118 strike works out to a ten year Treasury bond yield of 2.27%. The breakeven point in yield terms goes all the way down to 2.24%.

As long as yields stay above that by the July 18 expiration, we will keep the entire profit on this trade, a gain of some 1.76% for your total portfolio. Better yet, get a three point dip anywhere along the way, and we will immediately reap 75% of the potential profit, as we did with our last (TLT) bear put spread.

Sounds like a no brainer to me.

I think this week flushed out a lot of the hotter short-term money from the market in the humongous short squeeze that I warned you was coming. Positioning is now flatter. It is now time to digest.

Mad Day Trader Jim Parker also thinks we could be in for a major trend reversal with next week?s Friday nonfarm payroll report. Bonds rallied on the last six consecutive reports. This time they may disappoint, as bond prices are at such nosebleed levels. We could be setting up for a big ?buy the rumor, sell the news? move here in bonds.

In the meantime, the (TLT) could rise as much as a point higher to $116. That still gives me plenty of breathing room with this new position, which has a breakeven point at $118.45. That sounds like a pretty good bet, now that we are headed into the slower summer months.

For us to lose money on this trade, the world would have to end first, at which point we won?t care about our trading books.

For those who don?t have options coursing through their veins, please buy the ProShares UltraShort 20+ Year Treasury ETF (TBT), a 2X short Treasury bond fund.

As for stocks, it is looking like we are just completing a five month long ?time? correction. The ?price? correction never extended beyond 6%. We are about to enter nine months of increasingly positive economic data, as most of the growth lost in Q1 gets rolled forward to Q2, Q3, and Q4. That should take the S&P 500 (SPX) up to 2,100 by year-end.

In the meantime, the Mad Hedge Fund Trader?s Trade Alert service is now up 15.3% on the year, and is inches from a new all time high. Watch this space.

TLT 5-29-14

TBT 5-29-14

SPX 5-29-14

VXX 5-29-14

ShockedIt?s Really Been One of Those Kinds of Years