While stock markets are in turmoil and homework is hostage to headlines, today I will discuss the opportunity inside three trend longs that could be a short. My picks today are the iShares 20+ Year Treasury Bond ETF (NASDAQ:), SPDR Gold Shares (NYSEARCA:), and iShares Silver Trust (NYSEARCA:). Markets are near all-time highs and with so many risks, there are no shortage of stocks to short. But the bottom line is that there is too much love for my three stock choices.
The two biggest nations are fighting an economic war, but the problem is that they’re doing it in public over tweets and state media releases. So it is not surprising to see the whipsaw action in stocks. Needless to say, that homework means little when headlines hit. Global investors are connected electronically. As a result, the reactions are instantaneous and in unison.
Headlines rarely change the fundamentals and I do expect this to end. Meanwhile, the TLT, GLD and SLV stocks have run too far without proper check-back to build a base. That makes them vulnerable to fast falls.
A Long That Could Be a Short: iShares 20+ Year Treasury Bond ETF (TLT)
Bonds have been on an incredible rally. This is partly due to the uncertainties in the stock markets as money runs for bond cover, so they bid TLT stock higher. Because of recent central bank actions, bond yields are also in free fall. Although the yields can go lower, I think the run in TLT stock is too extended and a pullback is likely. Don’t label me a “bond hater,” though, because this is mostly a play on the charts.
Short-term, the risk for TLT stock is a drop to $145 per share. This has been a point of interest for the last three weeks, meaning the bulls and bears like to fight over it. It should provide some support if and when TLT goes there, but it may not hold. TLT stock would still be overextended and from there it could take another leg lower.
U.S. Bond bull thesis is the acronym TINA — there is no alternative. Virtually all overseas bonds are yielding negative rates. So anyone who wants to invest in bonds without a guaranteed loss is forced to buy U.S. bonds.
What is missing from the media rhetoric is that TINA also works for stocks. Year-to-date the S&P 500 is up 15%. Meanwhile, the U.S. 30-year bond yields less than 2%. So eventually this trader infatuation with the TLT on Wall Street these days will come to an abrupt end.
Technically, sharp wedges elevate the odds of a drop in TLT stock. No, I am not calling for a complete crash in bonds, but a correction is likely. So if I do have gains in them, I would lock some in. Moreover, it’s worth adding a few TLT shorts up here. Shorting tickers naked creates unlimited potential losses and this is too risky for this purpose.
Luckily I can short TLT stock using the options with relative safety. I can either sell call spreads above or buy put spreads below out into the October contracts. The September contracts would also work, but they would make for faster losses if I am wrong. This all depends on investor time frame and activity levels.
SPDR Gold Shares (GLD)
Wall Street has a love-hate relationship with gold. The GLD stock usually runs in long stretches in either direction. Back in 2011 everybody loved the shiny stuff and GLD stock broke above $180 per share. But then it all came crashing down in a big way just when gold would go above $2200 an ounce.
For the past few months, investors rekindled their love affair with gold and it is starting to feel like 2011 extreme levels. The bids for GLD stock are too strong. Part of it is justifiable, since gold is a safety trade and we have geopolitical headline havoc. When investors get nervous they sell stocks and hide in bonds and gold.
After peaking in 2011, GLD stock fell 40%. Extreme love for it turned to hate quickly and this could happen again. GLD rallied 19% since May and it left many open gaps behind. It is likely that there are plenty of weak hands susceptible for a panic sell trigger.
If for whatever reason GLD breaks the ascending trend line, then there will be a rush for the exits and the doors won’t be wide enough to accommodate every seller. When things are going well for a ticker, investors tend to forget the risks.
Why now? GLD stock is now at the 50% retracement level of the fall from 2011 grace. Thanks to Fibonacci we know that those are important levels. In this case, the zone is likely to be resistance especially that now machines trade according to mathematical rules more than ever.
My bearish position on it now is nothing against the metal itself. Long-term gold should go higher because it is rare and people love it. My argument here is for the fact that short-term, investors in the GLD stock are complacent much like they are in TLT.
Both these bulls are too comfortable in their long positions and that’s when accidents happen. Here too I can use GLD options to sell call spreads above and or buy put spreads below for the next two months.
iShares Silver Trust (SLV)
Usually intra-day when the U.S. dollar spikes, metals like silver and gold pay attention. Yesterday, there wasn’t even a flicker in the SLV stock as the U.S. dollar rallied. Complacency like this usually brings surprises. And in this case I bet that the SLV rally will end in a bad accident although for now it’s a tough trade to short.
Just like the other two opportunities, shorting the SLV stock for the next two months is also a viable thesis for the right portfolio. Someone who is very long stocks might want to skip this because these days this metal acts inversely correlated to stocks. Here too, using the options markets is the safest way to accomplish this with limited risk.
Of the three, I favor the TLT or GLD stocks to short. I have had difficulties in the past when trading SLV stock. I found it to be less liquid than the other two, so fills and premium forecast were more difficult. My note today is perhaps more of a note to book profits in SLV longs than a strong short.
Regardless which of the three stocks I short, conviction from the ideas today is at best medium. So, I would keep a short leash on any of these trades discussed today. To short TLT, GLD, or SLV stocks right here means that I am fighting the tape, so I cannot be too stubborn with it. I consider this a trading opportunity inside of three very steep wedges.
Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.