Ripe For The Picking: Time to Short Muni Bonds?

ETFs tracking municipal bonds

. Well, at least they proved doubters, Meredith Whitney among them, wrong on the road to some stellar performances. Yes, concerns about major budget issues facing scores of U.S. states, cities and towns were and still are legitimate. However, yield-starved investors put those concerns on the back burner and did some serious shopping with muni bond ETFs. There are no guarantees of imminent declines, but looking at the charts and indicators of many muni bond ETFs, it's clear this group has moved up in a big way and the time might be right for some profit-taking if not all out shorting of these ETFs. Unfortunately, there isn't an inverse muni bond ETF on the market. Not yet anyway, but the highly liquid muni bond ETFs are shortable. Let's look at a few candidates.

With almost $2.6 billion in assets under management, the iShares S&P National AMT-Free Muni Bond ETF is the big kahuna of the muni bond ETF block. The bigger they are, the harder they fall, right? Maybe. If MUB fails to break through resistance in the $111 area, it could slide down to support at $107. From there, next support is the 200-day moving average below $104. MUB is shortable and there are options trading on the ETF so bears have two avenues for their aggression.

The Market Vectors High-Yield Muni ETF is bit easier to play with than MUB because it doesn't feature a triple price tag. What HYD does feature is a chart that is quite strong as the ETF has rallied $4 since August (that's pretty good among muni bond funds). Bears would do well to wait for HYD to test resistance at $31 and fail there before shorting this ETF. HYD must be shorted directly as there are no options on this ETF.

We admit we advised looking at MUNI

. We'd lean that way for the time being, but if MUNI violated support at $52.50, that would be a sell signal. MUNI has no options available, so it must be shorted directly. Just be aware of its light trading volume.

The Market Vectors Intermediate Muni ETF is kind of an under-the-radar play among muni bond ETFs, but it has a whopping $373 million in AUM and notched an impressive 2011 performance. Does that make it vulnerable to a pullback? Sure, but when? ITM has kept the good times rolling in 2012 and would not be worth shorting unless it failed to break resistance at $23.50 a couple of times or fell below $22 before then. Average daily volume is decent, which is a plus since there are no options on this one either.