Chart Review: TBT Survives the Test As Gross Growls and Romer Fails

In late February, I lamented that TBT, the Pro Shares UltraShort 20+ Year Treasury ETF, was careening toward a retest of the 200-day moving average (DMA) that it would lose. After three more weeks, the anticipated retest finally occurred, and TBT survived.

TBT survives a retest of the 200DMA
TBT survives a retest of the 200DMA

*Chart created using TeleChart:

The retest of the 200DMA was a great reminder of the importance of follow-through when following technicals. Although TBT punched through the 200DMA on March 16th, the peak of fear over the nuclear crisis in Japan, it bounced back to close just below the critical support line. The next day did not bring follow-through downside. Instead, TBT gained a little. A week later, another test could not take TBT below the 200DMA, and the ETF has not looked back since. TBT survived the retest.

I thought to post this chart because of a MarketWatch article sent by a friend titled “Pimco’s Gross ups bets against U.S. sovereign debt.” In late October of last year, Bill Gross called for a top in bonds and that helped confirm for me a bottom in TBT. Now that Gross has become an outright bear, I am thinking TBT still has plenty of room to run to the upside. Here is how Gross is supposedly positioned now:

“After dumping all such holdings in Pimco’s $235.98 billion Total Return Fund, the world’s biggest bond fund, in February, Gross placed bets wagering on further price decline in these type of securities in March, known as shorts in financial markets. That pushed holdings of U.S. government-related debt weighted by market value down to negative 3% by the end of March compared to zero in February and 12% in January, according to data available on the company’s web site on Sunday.”

With the Federal Reserve scheduled to wind down QE2 within two months, U.S. Treasury bills will lose a lot more buying support, making a position in TBT seem even more attractive. If enough of the cash swimming in the economy somehow makes its way back to U.S. Treasury bills, I have to assume it will be part of a “flight to safety” that takes out the little buying volume stocks have enjoyed for so many months. In other words, either bonds are going or stocks are going (maybe both?).

One of the most interesting failures of QE was that it was supposed to keep long-term interest rates low. Instead, long-term rates have trended upward ever since QE became official. In a classic case of over-emphasizing desired outcomes over reality, Professor Christina Romer, former chief economic adviser for President Obama, claims that the Federal Reserve drove long-term rates DOWN with QE (you can roll the tape to 1:25). She was attempting to describe QE’s success, but after interviewer Aaron Task called out the error, Romer had to fall back to unnamed academic studies to defend the practice of printing money to solve economic problems. Romer wants another QE encore…

Be careful out there!

Full disclosure: long TBT

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