If the stock market reverses down hard, then bonds will go back up to new highs.
We all know the Federal Reserve has artificially propped up the U.S. bond market with their money printing programs. These open market operations (QE) have inflated bonds (dropped interest rates rates) to ridiculous levels. But today, the U.S. bond bubble is perfectly set up to burst. As you can see from the chart below, the Grail Timing Indicator is throwing off a compression sell signal today. Here is how compression is defined:
A Grail chart setup we see when a stock (or market) oscillates back and forth in a tight trading range. Once it breaks out, the stock has an upside Geyser. Once is breaks down, the stock is ready to crash into a downside Geyser. Think of “old faithful” building up pressure right before it explodes into a Geyser.
Look at the chart of the (TLT) below...bonds are on the verge of having a downside Geyser. Whenever the Grail “paints-up” in cyan, buckle up because of big price move is coming. TLT broke one of its key pivot points at $117.57. This giving me some initial confidence a downside Geyser is starting. A break below the December 1, 2011 pivot of $115.80 would give me additional comfort the U.S. bond bubble is indeed bursting.
A way to play this potential bursting is to buy the 2x inverse of the +20 year Treasury bond Index (TBT). As you can see from the Grail chart below...TBT is trying to have an upside breakout. It will take a move above the 12-1-11 pivot of $20.15 to confirm an upside breakout is taking place.
In summary, the air appears to be coming out of the biggest bubble since the dot-com days. The bear call on bonds has made a lot of famous people look stupid. If the stock market reverses down hard, then bonds will go back up to new highs (making me look stupid, too). Always use stops to protect yourself against loss from a bad market call. In this case, use a $124.05 closing stop on TLT before you throw in the towel for a loss. Also, make sure you size your TBT position properly. Never put all your eggs in one basket unless you want egg on your face.
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