iShares Barclays 20 Year Treasury

3/24/12         

   This week I am choosing to not recommend a stock, but to recommend one of the only ETFs out there worth playing.  An ETF (Exchange Traded Fund) trades like a stock and invests in underlying commodities, stocks or bonds.  Of all the ETFs available, the only ones worth trading are the gold ETF, GLD and the treasuries ETFs, TBT or TLT.  This week, I am recommending you buy and buy now the iShares Barclays 20 Year Treasuries (TLT).  The TLT is the long side of the US Treasury trade that invests in 20-30 year bonds.  It currently has an expense ratio of 0.15% but pays out a 3.37% dividend. 

            Now, you might be asking why the hell I’m recommending something that everybody in the world thinks has started a massive sell off and bear market.  Well, that’s the exact reason that I’m recommending you buy it, not sell it!  For the last month, since the stock market has hit new highs, all you hear about is how the US treasury bull market is over and done and all the money is coming out of bonds.  Well, if you look at how the stock market and the treasury markets have been trading over the last week, you’ll see exactly the reason why I want to be long the treasuries.  Last Tuesday, BHP Billiton, one of the largest miners in the world, said they expect a slow down in China to last for an extended period of time, saying “China wouldn't consume much more iron ore in 2020 than it does now helped spurred the sell-off.”  That helped drag the stock market lower and in turn, marked the 8-month low in the 30-year treasuries, before rallying off that low.  On Thursday, we got a weaker than expected China PMI, which created a stock sell off and continued the rally off the lows in the treasuries.  Any negative news out of China is a welcome sign for the treasuries and a bearish sign for US equities.  Additionally, with a Presidential election coming up, and continuous problems out of Greece and the rest of the European nations, there is no reason to be “all in” in the stock market.

                    While some of the US economic data has been positive and better than expected, new housing starts are still weak, as noted by KB Homes on their conference call Friday.  The Fed has shown no signs that they will begin raising interest rates before 2014, which means they still see weakness in the jobs market and home buying.  Further, the Fed has been buying up treasuries over the last few years though QE1, QE2 and the Twist program, and has yet to unload those purchases.  If you think the Fed is going to take a loss on any of those trades, you are sadly mistaken.  This most recent drop in the treasuries was just a head fake down, before a rally to make new highs where, at that point, you’ll see the Fed begins to sell off their treasuries positions.  
            Looking at the charts, it further demonstrates my opinion of a head fake down.  Without focusing on the 30 year Treasury futures market (the market that the TLT most closely tracks), look at the daily and weekly chart of the TLT.  We’ll start first with the daily.  If you look at how the TLT traded on Monday and Tuesday, you’ll see they not only traded right down to the 200 day moving average (where it then bounced off of), but it also put in a bullish tweezer bottom.  What that means is on Monday, TLT traded to a low of $109.69, continuing its bearish downward move, before finishing slightly off the lows at $110.01.  On Tuesday, the stock opened higher, traded all the way down to the low of Monday, before rallying back up, to close up on the day at $110.54.  Since then the TLT has rallied to $113.21.  

            Now take a look at the weekly chart of the TLT.  Two weeks ago, TLT closed at a 5-month low of $111.43, which is right at the 61.8% Fibonacci retracement.  TLT then opened last week at that same level, traded slightly below $110.00 (hitting all buy/sell stops to wipe everyone out), and then turned and rallied to close at $113.21, a few dollars off of the 50-day moving average.  Last week’s bullish move on a candlestick chart is called a bullish piercing line (after a long red candle (downward move), a white candle (upward move) closing at or near the midpoint of the previous bar).  A move such as this almost always confirms that the Bears have sold out this market and the Bulls have regained control. 

            I am recommending you buy TLT at the open on Monday, around Friday’s closing price of $113.21, and you can stop yourself out on the downside at $107.15, which would be slightly below the 50% Fibonacci retracement.  I’m looking for a move above $125, giving you about a 12% gain, plus the almost 3.50% dividend. 

            Full disclosure:  I currently hold no positions in as I prefer to trade in the futures market.

Jeff Lewison