Yields

Just when it looked like the volatility in the markets had vanished, it appeared again like a magician giving back the legs back to his assistant that he had just “magically sawed off.”  “Where did her legs go mommy,” asks the inquisitive child in the audience. “Don’t worry honey, they always come back.”

TA-DA!  The volatility is back, indeed, even if it is to a lesser degree than what we experienced a few weeks ago.  Is the trade war dispute back in the spotlight? No. Is the Syrian conflict back in the spotlight? No. OK, North Korea then?  Nope…it’s our old friend from the Treasury markets: YIELDS.

Yes, in my opinion traders have shifted focus to the rise of the 10-YR yield as it came dangerously close to the February high of 2.943%.  There is a very good chance that that is breached today! Then traders will be quite fearful of the 3.000% threshold, which should usher in even greater volatility.

How can an equity trader take advantage of this situation?  As you may know, there is an ETF (exchange traded fund) for nearly every asset class, as well as levered derivatives.  In the interest rate space, the major ETFs would be TLT and TBT (inverse). So if one expected the Treasury price to decline and the YIELD to rise, he would buy the TBT.

Over the years I have developed several very sophisticated algorithms, such as signal processing algorithms, measuring the activity of “informed (HFT) traders”  and machine learning algos to name a few. In the chart below you can see a few arrows, which points out the bar and the “HFT tracking” algorithm in the lower indicator window. Its reading was showing that the HFT (high frequency traders) in the Treasury market were over 90% bearish, thus making the probability of a drop in price, and spike in yields, rather high.

The next chart shows the exact corresponding bar in the TBT with the green ellipse, which was a buy signal near $36.75.  As you can see, the long in the TBT exchange traded fund (ETF) moved up quite nicely as the algorithms on the prior chart stayed 90% bearish.  The indicator on the very bottom is a regime-switching algorithm and is a story for another time.