Reaching a Breaking Point

Over the course of the past two weeks, we have seen the S&P rally 8%. And in the last three weeks, bond yields have moved from about 1.7% to a low of 1.31%.

Both of these moves seem misplaced. Technical factors have been the driver of these rallies rather than fundamental reasoning.

With respect to the equities markets, we have been seeing a lot of chasing as investors braced for a sell-off that never came and are beginning to cover their short positions and race to add exposure to gain upside participation. Grumblings of anticipated better earnings and renewed support from both fiscal and monetary policies are beginning to be the sole justifications of all-time highs.

To be sure, market highs have been hit in the S&P 500 and the Dow. But the Nasdaq, transports and small caps are still at least 3-5% from making new highs.

In our minds, this situation is not exactly a healthy market. With regards to bonds, sentiment has dramatically shifted from the worst place to be in the face of an imminent Fed hike to the best place to be. For the last couple of weeks, we have seen money pour into bond exchange-traded funds (ETFs), again prompting a performance chase with little fundamental support behind it.

While we are positioned to benefit from a pullback in the equity markets today, we want to dig in for the pullback in interest rates. When you receive this alert, buy ProShares UltraShort 20+ Year Treasury ETF (TBT), which last traded at $30.33, and buy to open the iShares 20+ Year Treasury Bond ETF (TLT) August $138 puts (TLT160819P00138000) that last traded at $1.28 and expire Aug. 19. We believe these two securities will provide us with a great profit-making opportunity when rates bounce higher.

The tremendous rally over the last couple of weeks has set us back a bit with our current positioning. However, we continue to have high conviction in our positions and believe this most recent rally will fade as well. That said, we are continually monitoring market conditions. If we find that some of our current positions are in jeopardy, we will not hesitate to sell them. The markets are in a state of flux and we have entered into a period of high volatility. So, be alert and we will be sure to keep you informed along the way.