A Foolproof Fear Trade, Courtesy of Greedy Hedge Funds
Fear is everywhere these days…I see it in Walmart. Young parents afraid to look at prices in the baby formula aisle. Shoppers cringing when they hear the total at checkout. Drivers don’t even need to get to the gas station to feel the fear. Just starting the car is enough to dread that $4.50/gallon refuel, even knowing there’s no other choice… And, most of all, fear is cropping up in financial markets. Cascading selloffs in crypto. Volatility in stocks. Household names like Netflix (NFLX) and Amazon (AMZN) dropping 40% and 73% in just over six months. All of it, driven by fear of even steeper losses… Fortunately, there’s a smart, safe trade for times like this. It’s known in hedge fund circles as the “flight to safety” trade — and it may be your best chance at doubling your money over the next six months. Let me show you what most retail investors are missing…
The Foolproof Fear Trade
The best fear trade is Treasury securities — and it’s all thanks to greedy hedge funds.See, individual investors like us hold cash when we sell. But when I worked for an investment firm, I was told we weren’t paid to manage cash. And the guys running the firm liked to get paid. (I think that’s a common trait for investment managers.) So, if we were holding cash at the end of the month, the firm bought Treasury bills. I was puzzled by this at first. Interest on the bills barely covered the commissions to get in and out of the trades. But that didn’t matter to them. They were fully invested. They couldn’t lose money on Treasurys. And, most importantly, clients paid management fees that exceeded the interest on the bills. Hedge funds do the same thing every time stocks fall. They sell stocks but want to stay fully invested. In a fast-moving market, they don’t have time to think. So, they fly to Treasurys. And you know what? They’ve already started — which gives us an opportunity to profit…
This Could Double Your Money by November
In the chart below, we see that 10-year Treasury yields moved down last week as stocks sold off. This tells me traders are already starting to “fly to safety.”
Source: Federal ReserveOf course, as yields fall, prices of bonds rise. The iShares 20+ Year Treasury Bond ETF (TLT) gained more than 2% last week as the S&P 500 fell almost 2.4%. It’s always been this way. When traders panicked in October 1987, the S&P 500 fell more than 20% in one day — while Treasury bonds rose 3.6%. Gold rallied a similar amount, but gave back all of those gains the next day. That’s typical. Gold is a short-term trade, but Treasurys tend to attract money throughout a crisis. Traders just started rushing to the safety of Treasurys last week — which means TLT should continue to rally as the Wall Street panic continues. Now, you might be thinking the Federal Reserve is raising interest rates. They are. But it’s important to understand that the market sets rates on 10-year Treasurys, not the Fed. It’s determined purely by demand for the notes. So, as the “flight to safety” trade intensifies, the rate will drop even more. I expect rates on the 10-year to drop toward 2% as the bear market continues. That should lead to a gain of about 12% in TLT. It may not sound like much, but it’s huge compared to a loss in stocks. You can also use call options on TLT to benefit from the move. Calls could double over the next six months. This may be the only trade with that kind of potential in the dangerous market environment we find ourselves in.
Regards,Amber Hestla Senior Analyst, True Options Masters
Chart of the Day:Semiconductors — Trade the Channel
By Mike Merson, Managing Editor, True Options Masters
I wouldn’t call this trade “safe” by any means… but it still looks promising.The iShares Semiconductors ETF (SOXX) has formed a squeaky-clean parallel downtrend channel over the past 6 months. So far, there’s no evidence to suggest SOXX will break out of this channel in the near future. The moving averages have all crossed into a bearish setup, and what once acted as support is now stern resistance. If markets continue rallying this week, and semis along with them, I think you’ll want to buy put options on SOXX when it reaches $440 per share — with a plan to bail on the trade if SOXX breaks the upper blue line. If the bear trend continues in earnest, keep an eye on the 200-week moving average. SOXX hasn’t been under that line since 2011. It should act as critical support if things get that bad. That’s 26% lower from these levels, and if we reach that quickly, you want to be betting on a mean reversion to the upside.
Regards,Mike Merson Managing Editor, True Options Masters