Wednesday, May 27, 2009

Wednesday Was Not Kind to Long Treasury Bonds

Top Line: The stock market tried to continue Tuesday's rally but couldn't hold it. This rollover is probably going to take us down to 850 or so in the SP500.

The situation is that the market wants to go down before it goes up. We are just waiting for another buying opportunity. We expect a couple more weeks of softness in the market and no real downside pressure due to the many people who are just waiting for some opportunity to get into the market.

Today's market featured another drop in the Treasury bonds. TLT, an ETF that tracks the long dated Treasuries, was down again. TLT traded near 97.50 just last Thursday and today closed right around 90.50 for a seven point drop in four trading days. This week the Treasury is trying to sell some debt. For some reason, the results haven't been too bad but the Treasuries have not fared well at all. Since tomorrow is the last auction for the week, we may get some relief in this extreme selloff.

In last night's post we mentioned the QID which looked like a terrific buy this morning under 35. The QID is a short fund that is supposed to be twice the percentage move of the QQQQ's. This type of fund does not perform well over long periods of time and this is evidenced by the price low today. Today's 34.72 was the 52 week low suggesting that the QQQQ's were at their 52 week high which of course is not true. Today the QQQQ's were at a high of 35.19 even though the 52 week high was back in June of 2008 just over 50.

To make this analysis complete, last year the QQQQ's were at 50 and today they are at 35. That means that the price is 30% less than last year. That should mean that the QID would be 60% more than it was last year when the QQQQ's were 50. Instead the QID is about the same as it was last year. Yes, QID was over 100 back in the fall when the QQQQ's were down around 25. What this tells us is that these vehicles need to be used carefully.

What we mean by carefully is that if you can get on a move then you can make twice the amount using these vehicles; but, you need to get out when the move is over. No, that's not an easy thing to do but we have at least warned you.

For today, we would have bought some QID but we had some trouble with our trading account, a very unusual event that affected many traders. Our goal for that trade would be to hold it through the drop that should be ending in June sometime. This trade would have complemented our SDS trade which is a two times short based on the SP500. Again, these are not long term strategies or hedges, just short term trades. They are Not for everybody. If you want to make these trades be extremely careful.

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