Dropping to March Lows?

Hey There Income Hunters,

I was shocked to see the Fed pull back from their cautious stance on the economy in the minutes of the FOMC December meeting. 

I expected an announcement regarding an increase in bond purchases (QE) or even a move to cap long-term rates through a formal control of the yield curve.

Instead, the minutes revealed that the Fed may actually begin to reduce bond purchasing … beginning as early as the middle of this year.

They may be trying to stimulate spenders by changing to a more positive tone on the economy…

But the last time the Fed started to hint they were looking to pull back on QE the stock market had a major meltdown.

It was Q4 2018 and they had been scaling back on their bond purchases. The reduced stimulus forced investors to sell equity positions.

See below:

This time, the bond market is under pressure.

Supply is soaring and inflation is rising, causing bond returns to go negative. 

Without an expansion of bond purchases, the TLT bond ETF price could drop substantially.

There’s simply not much support against it, aside from March lows, unless the Fed buys.

Now, the bond market has been overvalued for months, so this could be an opportunity to jump on a quick slide down towards the 140 level (the level of support established by the March lows).

The Trade I’m Making

I am going to put on the 153/143 March 20 Put Spread on TLT.

It’s a 3-1 risk reward and I’ll get myself out on the trade if TLT closes above 154.77.

This is a “trade the Fed” play …

If they are not supporting bonds when they are overvalued and the technicals are bearish, it’s a green-light special.

As Income Hunters we want to find the trades that put the odds in our favor, then pull the trigger and have an exit strategy so we can execute efficiently.

That’s what we have here.

Live & Trade With Passion Friends,

Griff


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