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Gold and TIPS Diverging

Since the Match 2009 bottom many correlations have held extremely well.  We covered one in a previous post titled “US Dollar Correlation Breaking Down” and other ones here.  We can now add one more broken correlation to the mix.  TIPS and GOLD have been trading very much inline with each other over the last nine months or so.  The primary reason for the correlation is that since they are both seen as inflation hedges they should trade together.

As you can see in the chart below gold and TIPS have trade very much in line for most of the last nine months.  Over the past two weeks however the two instruments have diverged with TIPS going higher and gold going lower. 

GLD-Gold ETF and TIP-TIPS ETF

gold-tips-overlay

So the big questions are why are these diverging and how can we make money from it.  You irst have to decide if you think inflation is going up or down and if you think TIPS and Gold are good inflation hedges.  If gold is a good hedge and you think that inflation is going to increase then you would want to be a buyer of gold.  If you think that inflation is set to decrease or that inflation expectations are overdone then you would likely want to short TIPS.  The other main way to trade this is to bet on a convergence and a return to correlation.  To take advantage of this you could buy gold and short TIPS.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-No positions in the securities mentioned.

Favorable Risk to Reward in Treasuries

While many investors are calling for a large drop in long term Treasuries we are currently seeing a good risk reward trade to the long side in the long bond. In the chart below you can see our reversion to the mean chart on the 30-year Treasury yield. When it is stretched to the downside things are bearish and when it is stretched to the upside it is bullish. Right now it is stretched almost 1.5 standard deviations away from its historical mean which usually leads to a move lower in yields and a move higher in bond prices. (Click on chart twice to enlarge)

30-Year Yield Reversion to the Mean Chart

tyx-30-year-treasury-yield-rtm-chart

As you can see in the chart below of the 30-Year Treasury yield we are at the top of a long term downtrend in yield. Each time since the 1987 that yields have hit this line they have gone lower. Eventually this will stop and yields will breakout to the upside but if history is any guide and the trend continues than at least for now yields are once again headed lower. (Click on chart twice to enlarge)

30-Year Treasury Yield

tyx-30-year-treasury-bond-yield-long-term-chart

Finally lets look at the LT 20+ year Treasury bond ETF. As you can see below it has found support over the last seven months in the highlighted $86-89 range. On the upside we have resistance around $98. The risk to reward is quite favorable right now as we can risk $1-2 with an upside around $9. (Click on chart twice to enlarge)

TLT-20+ Year Treasury Bond ETF

tlt-one-year-chart

So while this may be the time that Treasuries tank and yields go screaming higher we doubt it and are modestly positioned to the long side. Eventually we will be shorting Treasuries but not until yields break out and end the trend that has been in place for over 20 years.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently long TLT

Where Did All The Contango Go?

For the first few months of the year West Texas Crude Oil was in an extreme contango situation.  In fact it got as high as 20% just four months out.  Looking at the 4-month contango/backwardization  in West Texas Crude Oil we can see that in just the past seven weeks it has dropped from over 15% to just 3.2%.

West Texas Crude 4-Month Contango/Backwardization

oil-contango

Most of the narrowing has happened in the near month futures, since over the past seven weeks the near month has rallied  27% and the 4th month only 14%.

Obviously the big question should be is demand really picking up? If so Oil should rise fairly quickly as we continue to see declining production as well as a decline in the ability to produce via the drop in rig counts over the last eight months.

Or is this a short term rise based on the notion that the economy is improving and this is just an extension of the risk trade?  If so then oil is to be shorted as are many other commodities as the reflation trade is put on hold.

We try not to fight the market and right now it is obviously in bull mode as it has moved up 75% from its lows.  That being said we tend to listen to the signals from economic indicators like capacity utilization, unemployment, and Fed minutes that show anything but an economic recovery.

West Texas Crude Oil

oil-bull

For now the trend is up and we are modestly bullish (that means we are flat) bulls.   However over the next few months we would not be surprised at all to be changing our view to the bear side and going short as the lack of demand likely overtakes these sorry excuses for green shoots and the economy, and therefore demand, roll over.

Happy Trading,

Dave@TheMacroTrader.com

Site Updates- Yesterday we installed Disqus to better  interact with our blog readers.  We welcome your views on energy, the economy, and any other financial topic.

UNG Natural Gas ETF

In our newsletter this week we went long some UNG-Natural Gas and it is working out well. The long term supply and demand characteristics were very favorable around the recent lows and we had a good technical picture as well. As you can see in the chart below UNG has exploded to the upside on extremely high volume. To put where natural gas is in perspective we also included a longer term chart showing the past 14 months.


UNG-Natural Gas ETF

ung

UNG-Natural Gas Long Term Chart

ung-lt

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you don’t want to miss out on more trades then subscribe to our weekly newsletter where we provide research on Domestic Equities, Foreign Equities, Fixed Income, Commodities, and Currencies along with a model portfolio. If you are interested in going beyond US stocks to generate returns in any market, we at The Macro Trader can help.

Potential Inflation Trades

Tuesday the Fed came out and said that they will not be expanding their quantitative easing operations.  They claim that things are looking good enough that they do not need to do more.  Of course we also had a really bad GDP number and long term rates have been climbing ever since the original announcement.  If the Fed is right and things are improving then we can expect to see some fairly strong inflation coming up in the next few months out to about two years.  Essentially at some point relatively soon we are going to be in a very inflationary environment.  Here are two sectors that we think will benefit from inflation, and will likely do well even if inflation is relatively flat.

MOO-Agribusiness ETF

moo

OIH-Oil Service HOLDR

oih

Happy Trading,

Dave@TheMacroTrader.com

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