Wall Street Elite January Trade Recap (LQD, IYT, GDX, CNI)
01/28/13 by Hugh L. O'Haynew
Filed under Uncategorized
We’re watching the corporate bond class – as represented by the iShares iBoxx Investment Grade Corporate Bond ETF (NYSE:LQD) – start to gather downward momentum.
From its all-time highs of just over 123 in October, LQD drifted slowly lower, and in mid-December for the first time in fourteen months hit its key 137 day moving average. As the chart below shows it spent the next month dancing and flirting with that line of support.
Then, last Friday, something significant occurred.
LQD broke away from erstwhile support at the 137 DMA and began falling toward the next major line of support at the 274 day MA (see red box, below). That line is currently found at LQD 118.5, and rising.
This is a critical development, as it will very shortly become clear that, technically speaking, corporates are daily becoming a riskier proposition. We will not see 123 again on the LQD ETF, and once the 137 DMA turns over we will have a roof over the stock and the sector at roughly LQD 121.
In fact, a close look at the 137 DMA reveals that it has currently ceased its rise and is in the process of flattening. When it begins to turn over, the likelihood of profits on long term LQD shorts will be greatly enhanced.
Here’s LQD for the last six months:
The chart shows both RSI and MACD indicators submerged below their respective waterlines and no markers pointing to their staging an imminent turn higher (blue boxes).
We have an open trade on LQD, a March PUT which is still in play, but we may have to roll it out some to get more time on the trade. That, of course, all depends upon how LQD behaves over the next couple of weeks. If we see a meaningful decline, we may be able to close out without extending the expiry. If not, we’ll act accordingly.
Either way, we’ll be watching and we’ll keep you posted.
The Larger Bond Picture
As far as the broader bond universe is concerned, please recall that the scenario we’ve been reiterating in this space ad nauseum for well over a year now is that the flight to equities (that is now commencing) will be accompanied by a concurrent retreat in investment grade fixed income securities. The one’s gain will reinforce the other’s losses, and vice versa. We are speaking of a self-feeding loop that will very likely gather steam as the two begin pushing more conspicuously in their respective directions.
So, at the risk of causing you to roll your eyes, or worse yet, to drift off into a full-blown daze of boredom, we repeat here once more that fixed income securities of investment grade are heretofore a losing proposition.
You will be lucky over the long term to make any money on them; you will certainly lose tremendous opportunities to redeploy more profitably, and if you hold to these instruments to maturity and come away with a nominal gain, it will more than likely result in a significant loss to inflation.
That’s the truth as we see it for genuine fixed income securities – actual treasuries and corporates. But for those of you who are holding proxy fixed income investments, by way of mutual funds or ETFs, it also bears repeating – there is no fixed maturity date for these investments. You could theoretically hold and lose for as long as you owned them – for as long as the securities existed, even. Unlike a bond, for which you’re at the very least rewarded with interest payments and return of capital at the end of a specified holding period, mutual funds and ETFs guarantee nothing.
Now, dear readers, is the time to back out gracefully, to take whatever winnings (or losses) you may have acquired until now and follow our suggestions going forward for a more profitable deployment of resources.
We’re going to offer some encouragement now for all those who put on the CNI/IYT long/short trade we initiated two weeks ago. Since then, the trade has moved against us. CNI is now trading for $94.92 and IYT for $104.38. That’s a spread of $9.46 against our initial credit of $6.03. We’re therefore looking at a loss of $343 for each 100 shares paired on the trade. For those who can’t stomach it, or who don’t have the margin to withstand the current loss position, you have no choice but to cut out and take your losses.
But if you have the juice, we believe you ought to hold at least until you’ve had a look at the following two charts.
The first is CNI.
There’s really nothing that would commend us to sell our position in CNI, according to the technicals. The moving averages are unfurled and trending higher in sustainable fashion. We have recent new highs (in red) and no sign of excess buying on the part of RSI and MACD indicators (in blue).
Now look at IYT, and especially at the bottom of the chart, where we’ve highlighted a wildly bullish pop in the RSI reading – one that puts it into the category of immediate sell, in our books, and in those of most technically oriented investors.
After a near vertical 22% move in two months (in red), on three times average daily volume (in black) that sent the RSI reading well into the overbought ether, we say thos guy’s ready for a tumble. And when she does the slow and steady climb of CNI will return our trade to profitability.
In short, hang tight – if you can.
Shut Her Down, Jughead!
Two of the themes we’ve been discussing of late, 1) transport strength, which we’ve alluded to above, and 2) gold miner weakness, which has been chronic, and about which we’ve literally drenched these pages in ink, we also parlayed into an interesting zero premium trade two weeks ago in Transporting the Gold Miners to Hell.
There, we told you to buy the Market Vectors Gold Miners ETF (NYSE:GDX) March 44.50 PUTS and sell the iShares Dow Jones Transport Average Index ETF (NYSE:IYT) March 97 PUTS – both for the same price. The trade cost you nothing but commissions to initiate and the spread has now widened in our favour to a frightening degree.
The parabolic rise on IYT, which you saw on the chart above is clearly unsustainable.
On the other side of the trade, however, GDX has finally broken lower the way we always believed it would and now looks like it’s ready to test crucial support at its previous lows of $40.50, and if that fails it could fall as low as $39.00.
GDX has basically gone to hell.
The only clear technical bottom we see for GDX is at $35.00, the simple Fibonacci retracement level for the bull move that began back in October of 2008.
But with that we get way ahead of ourselves. Our purpose here is to close the trade. For though there still may some downside to be extracted from the miners, there’s likely little more in store for us on the upside from the transportation stocks.
It’s time to bail.
Wall Street Elite recommends selling the long GDX PUTS, now trading at $3.20 and buying back the short IYT PUTS for $0.59. That’s a very nice haul of $261 per pair traded.
Stay afloat, friends.
With kind regards,
Hugh L. O’Haynew