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Short Treasuries with TBF for an Overbought Market

Further upside seems unlikely. It's time for a correction.


U.S. stock and ETF indexes closed mostly mixed for the week as they digest recent gains and continue trading below significant resistance.

On My ETF Radar

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A quick glance at the chart of the Dow Jones Industrial Average gives a clear picture of the present situation.  The Dow Jones Industrial Average and its related ETF are near overbought territory at 66 on both daily and weekly RSI and this is a level from which declines oftentimes start.  Momentum is waning, as represented by MACD, and it’s quite clear how price has stalled at just below the 14,000 level on the average.

No further upside move is possible without clearing the 14,000 level and holding above that level, and it’s quite likely that move will not be possible without a decline first to work off overbought conditions.  There is significant support around 13,300, 13,400 and 13,900 and so one could expect those levels form a floor, at least temporarily, for any upcoming downside move.

VIX, the S&P 500 Volatility Index, also known as the “fear index,” fell 3.56% on Friday, and VIX ETNs also declined with iPath S&P 500 Short Term Futures ETN (NYSE:VXX) losing 2% and VelocityShares Daily 2X VIX Short Term ETN (NYSE:TVIX) dropping 3.8%.

February’s big event will be the “Sequestration Countdown” as Congress and the White House debate the future of government spending.  March 1 marches ever closer with its $1.2 trillion in automatic government spending cuts to both domestic and social programs over the next ten years if our political leaders can’t come up with a compromise solution to avoid it.

President Obama has been campaigning for a package of more taxes along with spending cuts, while Republicans are digging in for no more tax increases and just spending cuts to take place during this round of negotiations.  Many analysts say that the magnitude of these cuts could trigger another recession, which could already be underway with the initial Q4 GDP printing a -0.1% reading.

Of course we’ve been here before; just remember the New Year Eve 11th hour settlement of “Fiscal Cliff: Part 1,” and both sides now seem to be no closer to agreement or compromise than they were in the summer of 2011 or last New Year’s Eve.

As the clock ticks, we can expect markets to get more nervous as people wonder if yet another 11th hour rabbit can be pulled out of the hat or if the politicians will once again defer judgment day yet for another day.

For the week beginning February 10, Wall Street Sector Selector will hold its position in  ProShares Short 20+ Year Treasury (NYSE:TBF) from $29.62.  As described last week, the position in VelocityShares Daily Inverse VIX (NYSE:XIV) was closed on Feb. 4 at $21.46.

Wall Street Sector Selector is “yellow flag” mode, expecting sideways action/consolidation/correction ahead.

Read on for my past alerts on trading the VIX and VIX ETFs:

Disclaimer: VIX ETNs are extremely volatile and can easily sustain large gains or losses. Risk management and position size are extremely important. Read the prospectus to understand the potential risks and rewards. It is possible to lose your entire investment. The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer, Terms of Service, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.

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