How I am Trading 0% Treasury Bills

I’m going through my normal preparations this week although I’ll be away for vacation. The market will be on vacation this week too. The market is closed on Thursday and will close at 1pm ET on Friday. These lightly traded holiday weeks have tended to be bullish so that is something to keep in mind. You will see below that there is a ton of economic data out this week. Combining all of those catalysts with a low volume week likely equals volatility and whipsaw. So be careful.

I’ll start off by taking a look at some basic moving averages. The standout continues to be IWM which continues to trade below its 50-day SMA while the other major indexes trade above their 50-day SMA. Ultimately, this divergence will have to be resolved with the other indexes following IWM or IWM following the other indexes.

Money is clearly shifting into more conservative securities. We’re also seeing money flowing into short term treasuries which has brought down short-term yields near 0%.

Not much has changed from last week. The one notable change is that FXC has broken below its 50-day SMA. However, FXC has broken the 50-day three times since the March low so I wouldn’t read much into it. The changes from last week are not in CAPS.

This is the weekly chart of the yield on 3 month treasuries. Stock Chartist explains that this might be evidence of bets being placed on a rising Dollar by foreign investors.  For example, you might make a short term bet that EURUSD is topped out and swap out your Euros for the Dollar. While you may not get a return on the treasuries, it can be a safe and liquid place to store your money over the coming months. Then in a few months you sell the treasuries and exchange the Dollars back into Euros at a favorable exchange rate.

Other ideas are similar such as a “flight to safety trade.” If you want to park cash, short term instruments provide a place to park your cash without taking on the risk of buying treasuries up the yield curve that could go down in value.

I think it is fair to say that the flow of money into short term treasuries is bearish as it drains liquidity away from riskier assets such as equities. This is the same kind of activity we saw at the end of 2008.

It doesn’t mean a “black swan” is in the works. This could be as benign as investors locking in gains for the year. However, when you see this kind of risk aversion coming into the marketplace it is a time to put your antenna up.

Let me script out a scenario. Let’s operate under the assumption that the flight into short term treasuries and into large cap stocks is because of risk aversion. If the trend continues, it means more money flows into short term treasuries which translates into a rise in USD. If we get a rise in USD, stocks likely go down. Adding insult to injury, large cap exporters such as the Dow components have outpaced small caps because those stocks get a boost like all equities from the weak Dollar but also get a boost since their products are more competitive internationally due to the weak Dollar. If the Dollar trade reverses, I would expect the large cap exporters to get hit the hardest since those weak Dollar catalysts will be working in the opposite direction.

Going full circle, I mentioned at the beginning of this post that the divergence between IWM and the other indexes would need to be resolved. If this risk aversion trade is a precursor to a rising Dollar, it would also make sense for an index such as DIA to catch IWM on the downside closing the divergence.

IYT got a boost from Buffett purchasing BNI, but it has not been able to make a new high. It appears that a triple top could be forming. Let’s see if that 50-day SMA holds. IYT is an important index and I like to watch it as I try to determine which major index is telling the truth – IWM or DIA?

Not surprisingly, we got a little uptick on $USDUPX last week. We know money is moving into short term treasuries and it makes sense that the Dollar would push up some.

I’ve mentioned previously that I am not a big fan of trading individual securities in this market. Just about everything is a higher or lower beta bet on the Dollar. With that being the case, why not just stick to building a position in a major ETF instead of managing a bunch of highly correlated positions.

I really only see two trades right now. If you believe that this flight to safety is a short term countertrend rally in the Dollar then I would add a DIA position on any bounce of the Dollar up to the 50-day SMA. Other than a little protrusion in April, the Dollar has respected the 50-day since March. If this is just another test of the 50-day, you likely get a nice entry point in DIA. If you believe this flight to safety is the first signal of a turn in the market, you can wait for the break of the 50-day SMA on $USDUPX (which would be significant since it has not occurred since March) and start shorting DIA.

I’ll be away this week and part of next week so I’m unsure whether I will even take a position. I can also say I have not decided which one of those options I would pick. Sometimes you don’t have to decide. There could be some huge spike on $USDUPX which would make it a short DIA trade before you even have a chance to take a long position in DIA.

But what I am pretty sure of is that this simple trading strategy is my trading plan right now. If a particular stock looks very compelling, I might take a trade. However, I’m generally not interested in trading specific securities right now.

See above from briefing.com. There is a ton of economic data this week. This is another reason to keep your trading strategy nimble and simple. If you are trading a ton of positions, I can imagine the Existing Home Sales number pushing the market in one direction on Monday and having the market reverse course on Tuesday when Q3 GDP, Case Shiller and Consumer Confidence comes out. But what happens on Wednesday when Personal Income and Spending, Jobless Claims and Durable Orders is announced. With many traders being away this week, the market could be extra volatile when all of this economic data is combined with low volume.  Even though it is Sunday, I can already hear stops getting hit and see the frustration that whipsaw brings.

Earnings season is pretty much over but there are a few major companies reporting this week. HPQ reports ATC on Monday and DE reports BTO on Wednesday. There are also some consumer discretionary names reporting such as TIF. I have a link to briefing.com in the sidebar if you want to see all of the earnings reports.

Finally, I have added a News Mashup of my favorite news sites. It is a useful tool for me to quickly scan through the news headlines and perhaps it will be helpful to my readers as well. I have also added a Twitter Mashup. This is a work in progress. My goal is to find a group of individuals that provide good trading content via Twitter. I’ve already added a few names but the list is currently pretty limited.