Hold Your Nose and Buy This “Apocalyptic” Chart

By TradeSmith Research Team

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What’s destroying your 60/40 retirement portfolio?

What’s got bank CEOs sweating like pigs the world over?

Why’s the stock market on its knees even with strong consumer spending and employment numbers?

It’s the outright financial apocalypse happening right now in long-term Treasury bonds.

This chart oughta make you spout a bunch of “pardon my French”-type words you learned back in grade school…

Just look at this. Two decades of value creation, gone. Untold trillions of dollars in wealth, in what was once one of the world’s most robust markets… utterly destroyed inside of three years.

Holders of the iShares 20+ Year Treasury Bond ETF (TLT), if they’re still breathing, certainly aren’t happy.

Sure, that 50% loss isn’t the biggest of recent years. (Check out some 2021 SPAC listings – oof.) But the fall of Treasurys is profound because it sends shockwaves through every other financial asset in the world.

Long-term Treasurys are the largest, most liquid, most important market on this spinning rock of ours. Forget the big banks – this is the very definition of a systemically important institution.

The freefall in Treasury bonds reflects a growing distrust of American credit. Case in point: the oodles of debt added to the pile – almost $1.7 trillion just this year. The interest we’re paying on that debt, $883 billion and growing, only makes it harder to stomach.

As it’s been doing for decades, Washington keeps borrowing against tomorrow to pay its bills today. It’s gotten so bad, the feds came within hours of shutting down because they couldn’t agree on how to mismanage the debt.

This selloff illustrates an earned skepticism about America’s promise to keep paying its bills in the coming decades.

The ripple effects are genuinely hard to predict. Everything will feel the squeeze.

It’s not a question of “if” – only “when.”

Okay. Let’s take a time out… a deep breath… and set the bearishness aside for a minute.

Remember your training… The wisdom of the contrarian sages…
  • “Buy when there’s blood in the streets, even if the blood is your own.” – Nathan Rothschild
  • “Be greedy when others are fearful.” – Warren Buffett
  • And here’s a third one you may not have heard: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers
It doesn’t get much bloodier or more fearful than long-term Treasurys at their 20-year low.

So here’s a twisted idea…

What if the “so crazy it’s brilliant” thing to do, right now…

Is buy them?

The Case for a Violent TLT Reversal

Be warned, this trade is not for the faint of heart. Certainly don’t bet the farm on it. Don’t even bet the doghouse.

This is also a play for a short-term reversal here, and not a sea-change shift… The overwhelming trend in Treasury bond prices is down.

All that said, I gotta say… there’s one heck of a divergence between the sentiment towards TLT and the technical picture.

Take a look at this chart…

This is that same weekly chart of TLT, zoomed in on the last few years, with the Relative Strength Index (RSI) added.

Do you see what I see? There’s a long-term positive divergence on the RSI – a potential sign of a wicked reversal.

At $93 a share a year ago, TLT was more oversold than it is today at $84. Sellers are getting exhausted.

That could mean TLT is near at least a short- or intermediate-term bottom. With the Fed likely to cut rates sometime around the middle of next year, that seems possible.

Remember, Treasury bonds are systemically important. They represent, effectively, the faith in the United States as the economic center of the world.

Look around you. Are things a bit crazy? Uncomfortable? Yeah, no argument there.

But is the sky falling?

Is Warren Buffett rushing to dump his great American companies to snap up stocks from China and Russia?

Are foreign militaries goosestepping down Pennsylvania Avenue?

No, nope, and not even close.

To think TLT will endure anything close to another 50% loss without a dramatic change in the fundamental world order… It’s just unthinkable.

If it happens at all, it won’t happen anytime soon. The powers that be will protect America’s interests at all costs. The bloodletting in Treasurys will stop – it’s just a matter of time.

That tells me we could (and maybe should?) nibble on long-term Treasurys here as a short-term speculation.

The daily chart bolsters our case for a short-term bounce…

Here we’re looking at the daily chart of TLT, with the moving average convergence divergence (MACD) indicator added on.

First off, the RSI crossing above the signal line (a 14-period SMA with a standard deviation of 2, my own addition) means it’s on a buy signal. That happened right before Treasurys bounced on Oct. 9.

It is perilously close to falling below it, though. And if it closes below about 35, then we’ll have a fresh sell signal.

The MACD’s showing a buy signal too, with the short-term line crossing above the longer-term line. And on this daily timeframe, both the RSI and the MACD are showing positive divergence.

Even if the trend in Treasury prices is decidedly down, odds are solid that the next move in Treasury prices is higher.

What’s the best way to play that?

Juicing the Short-Term Treasury Move

Buying TLT here for a bounce is not likely to generate a substantial profit, unless you have a big position. A much-lower-risk, higher-reward-potential way to play this is with call options.

Call options give you the right to buy shares of stocks at a set price by a certain expiration date. When stocks rise, those calls rise in value.

As I write on Friday afternoon, the TLT December 29 $85 call option is trading for $2.42. Options trade in lots of 100 shares, so we’re talking about $242 per contract. And it gives you the right to buy TLT for $85 anytime before Dec. 29.

Let’s say TLT reverses higher and reaches its most recent peak at about $88.50 per share. Doing so by Halloween would result in a gain of about 124% on the option, for a profit of $300.

Even if it took until the end of November to see that move, it would still result in a gain of about 88%, or about $212 per contract.

(To make that same profit trading the stock, you’d need a position size of about $5,000.)

Remember, though: this is flat out a speculative trade. TLT can (and may) continue lower from here. If you’re making this trade, keep a close eye on it and look to take profits soon and cut losses sooner should the technical picture worsen.

Michael Salvatore
Editor, TradeSmith Daily