Buy bonds, short Boehner

Bill Gross, CEO of the world’s largest bond fund, Pacific Investment Management, has made the rounds of financial news saying that PIMCO has bought several billion dollars’ worth of short-term Treasury bonds. He also told Bloomberg that the government was not going to default, period. He said what most have come to believe and what the market has almost certainly already priced in.

House Speaker Boehner looks ever more likely to suffer the same fate as his predecessor, Newt Gingrich, who lost the support of both Main Street and Wall Street and was seen as putting politics first. Sadly, Boehner was still in the game even as people were furloughed, poor elderly people lost their daily Meals on Wheels, and perhaps most sadly, 30 children with cancer were turned away from an experimental new treatment by an unfunded National Institutes of Health. Despite all that, the House GOP gets respect in some quarters for standing up for principle.

Official portrait of United States House Speak...

Official portrait of United States House Speaker (R-Ohio). (Photo credit: Wikipedia)

Until some started asking, what principle? That lost the voters (who might still matter despite Citizens v United and the legalized bribery it has created). But now, as Gross pointed out, the shutdown is already having a ripple effect that will harm U.S. exports, freeze up credit, and lower fourth-quarter earnings. Now it’s about money, and the people are beginning to see the shutdown the way markets already do: as an expensive nuisance. If John Boehner were a stock, people wouldn’t just stop buying shares, they would be selling him short.

Bonds are part of a web

In the interview above with Bloomberg’s Trish Regan, he explained in detail how the markets are a web and equities can be affected, the strength of alternative “safe havens” like the German Bund can be affected, and so on. His complicated replay may have seemed to most investors like they were getting caught in a web of information overload.

Right now it’s hard to distinguish fact from opinion, especially when someone as authoritative as Gross has his game face on and is talking up his multi-billion-dollar bond purchase. Hard to distinguish fact from opinion, certainty from prediction, calculation from guessing, or wishing, or hoping. It’s hard to know what the truth is.

As a result, it’s very hard to trade. The relatively small volumes and range-bound price action reinforce what floor traders in Chicago and New York have been saying, that a lot of the smart money is simply taking a break and not in the markets.

[pullquote]We fall back on the truth, of course. And the only truth is price.[/pullquote]Don’t believe for a second this is because of disgust at Congress or the president or Washington in general. Disgust has been priced in. The Republicans’ willingness to play games with the economy to get their way is priced in. President Obama’s refusal to negotiate on denying Obamacare to uninsured people for an extra year or two — already priced in.

The market has already decided where it will go and the orders are sitting in the plans of the collective, waiting to be executed. All the smart money that has left didn’t just leave. If this is like every shutdown before, they put in their buy and sell stops (mostly buy, the chart suggests) and they are sitting there waiting for the market to come to them. This is true of stocks and bonds.

So what’s a dumb, old-fashioned technical trader like me supposed to do when even the explanation of the web of interconnected market forces is information overload? We fall back on the truth, of course. And the only truth is price.

ZB 12-13 (60 Min)  10_7_2013

So what do the price charts of the Treasury bonds (ZBZ13) tell us? Let’s start by zooming out a little to a 60-minute chart. We have a double bottom with a clear break above the high between the two bottom points. That signals the start of a real uptrend.

How far up will that trend go? We see that it reached a 50% retracement of the previous drop that began in June. Then it stopped and has moved sideways, with slightly higher highs, for nine trading days. In the nine days prior to Sept. 25, bonds jumped from below 130 to this range.

Even if you didn’t follow the news, you’d have to know there was some unusual circumstance stalling the uptrend at this level instead of letting the market continue up to the Fibonacci 61.8% level at 134’20. This is an artificial hesitation. A fictional reason to stop here and enjoy the view for this long.

Of course there is the chance of bonds dropping, especially if a default becomes real. But even then, traders know that Treasury Secretary Jack Lew can simply continue paying the bills and make it a default in name only.

ZB 12-13 (15 Min)  10_7_2013

Let’s zoom in to the 15 minute chart and see if PIMCO did its investors a service in buying so many bond futures. Don’t make the simple needlessly complicated. If you were looking at this afresh, without any thought of what the government or other investors and traders are doing or what the TV people are saying — heck, if you didn’t even know what market you were looking at and believed as I and most successful traders do, that a chart is a chart — would you say the trend is up or down?

Up, obviously. Would you say there’s a clear sign that the market has topped here and then remained in a sideways channel at the top?

That’s rather unusual. What we most likely have—and let’s remind ourselves we are always dealing in probabilities — is a market waiting to go up further, at least to 134’20 and probably well beyond. You have an uptrend marked by higher highs and higher lows since Sept. 7, with little correction waves in between.

And now you have a sideways channel that isn’t precisely sideways but keeps finding slightly higher highs.

You really don’t need to know much else. Do what you do to manage emotion and enter into trades with confidence, have your checklist handy, write down your entry and exit plans and how you will set stop losses and control risk, then do what price is telling you to do.

Price is the only truth. Listen to the markets when they tell you the truth. Give up the need to tell the market what it should do or what you need it to do. The market isn’t listening. It’s talking to you. Tune out the noise and propaganda from Washington and everywhere else, including your own mind, and listen to the market. It will tell you how to trade it.

So did PIMCO’s Bill Gross make a good decision buying all those bond futures? It looks that way. Whatever impressive and complex analysis he gave Bloomberg and CNBC, in the end he decided that the trend was his friend.

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