Wednesday, January 7, 2009

Where's The Juice?

Off and running in 2009, but where's the volatility you say? It's still there. You just have to look for it. And the only place I'm looking at the moment is in the 2x and 3x beta ETF products space. Specifically Proshares and Direxion's juiced up rentals. Today we'll go over the "short treasuries" theme, SDS vs. SSO, DXD vs. DDM, URE vs. SRS, and the amazing squeeze/reallocation of funds into PLD.

TLT was a favorite short at the start of 2008 as it would move to the high 90s every time a meltdown occurred. Then we would rally mildly and it would fall to the lower end of it's trading range. Well, as most of you know we had a meltdown. Treasuries ripped to the upside as we had fund managers playing a game of diversifying mattresses. The November 20 panic low corresponded with a gap up in TLT stopping out many long time shorts such as Jim Rogers. Then we get a big equity sell off at the beginning of December 2008 causing TLT to gap up even higher. And then came the FOMC December 16th cut to the 0-.25% range. TLT gapped higher. Was it an exhaustion gap or a continuation gap? For Pete's sake was the Fed going to continue to jam treasuries even higher? That's what most of us were thinking, but then the note that changed the game.....yet again.

The Fed will start buying 500b of MBS paper over the next two quarters. No doubt selling Treasuries to subsidize it's purchases. And voila`....the reversal begins. TBT which is the 2x inverse of TLT, or an Ultra short on 20yr Treasuries as it's name implies gets the nod. TBT starts to reverse back up through it's 9dma and makes a move on filling the gap down from Dec 17th. Then it makes a dash for the 20dma. All the while TLT reverses as the pair implies. Then Barron's finally gets involved in the act. "Get Out Now" they proclaim in an article that lays out this very thesis that so many traders have been eyeing. Short TLT, and get long TBT and PST. And Monday Jan 5th we felt the Barron's bounce.

It's still early on in this reversal, but it bares taking a stab at these levels providing the 9 and 20dma provide support now for TBT and PST. If shorting TLT these should be used as areas to add to an existing position or create a new one. Keeping 120 or as high as 123 as a stop level. TBT could use a stop of 38-39 for new positions. PST could use a stop at 52 with an upside target of 59-62. Volume is still thin on PST as the 9dma has not crossed the 20dma in this issue either. I would rather use TBT because it has more volume and it's pattern is the mirror image of TLT ie: with all those gaps to get filled. My target for TBT is 49 with 54 being my top end target for now. (Could go higher, but since it's new there is no 200dma yet.) TLT target is 106 with my top end target being 96.....with the possibility of a return to 91.

SDS vs. SSO. Sold my SSO last Friday thinking we would break down. SDS suffered a gap in the chart due to distributions, but the NAV could creep higher as folks buy insurance again for the tail events that keep popping up. However, the way Proshares handled their distributions really pissed off many traders, so we'll have to see how fund flows are for them after January. For the moment I feel there is a quick few dollars to be had intra day in SDS, but my bias is towards a panic move up in SSO which would have a weekly chart target of almost 35.

Same thing goes for DXD vs. DDM just with different numbers. Same huge gap down for DXD....same anger over the distribution....same chance for protection buying. However, if we get some panic buying in the market DDM could make a move on the weekly for it's 20dma of 39.75.

For URE vs. SRS I feel that since URE is trading like an option the better bet is there. SRS had a huge blow off move as the REITs finally fell apart. Could it bounce back up to 80? Sure it could, but it seems that traders are fading it on it's up days as money is being reallocated back into the REIT space. URE could move towards 12 in short order if the REIT space can locate adequate financing. Which is tough still in this environment. So keep your eyes on this pair.

Playing to that commercial RE theme is PLD. Actually this is one of the poster childs in the space. Essentially they got hammered as doubts about their debt rippled across trading desks. A management shake up and property fire sales have ensued, and in the past 6 weeks PLD has moved up some 600%. Not bad work if you can get it. I have a target of 20 on this one, but it's starting to get there now. However, as they stave off collapse the prospect of a move to 40 is not out of the question. We would need to see a break above the 20dma on a weekly with a settlement above that level for that to become our next target.

This is the first installment of juiced up etf pairs. There will be more to come.