A Tactical Short in Bonds

I was going to send out a note today where I dissect one of my favorite Bruce Kovner quotes and then get into how we can use Brier scores to make better probabilistically weighted market bets and combat two of our worst enemies, overconfidence and confirmation bias — the recent Invest Like The Best podcast with Michael Mauboussin dives into this (I highly recommend you give it a listen).

But, there’s a highly actionable setup triggering in the market so I figured I’ll put that note out to the Collective later this week and talk bonds and utes today.

The setup is for a swing trade. Specifically, for going short bonds (long bonds) and short utes (XLU). I’m neutral on US rates longer term. Actually, that’s not true. I think they’re probably headed lower (bonds higher) in the quarters ahead. Regardless, they’ve set up for a decent tactical short opportunity.

Starting with the 10-year. We can see that it’s pierced its upper weekly Bollinger Band near its 200-weekly moving average and then reversed. The highlighted bars show each time this has occurred over the last 3 ½ years.


Here’s a look at the same chart but on a daily. It’s also pierced its upper Bollinger Band on the daily timeframe and has completed a Demark 8-count.

Not only are bonds extended here but the copper/gold ratio is failing to confirm the recent trend. And as I wrote in Emergent Properties of the Market Collective the metals market tends to be the smarter of the two…

The technical setup looks even better on utes (XLU) — utilities tend to track bonds as the sector is extremely sensitive to interest rates. Check out the following weekly chart of XLU. It pierced its upper Bollinger Band then reversed and completed a weekly Demark 9 count last week.

The setup on the daily timeframe is similar.


A recent report by Sentiment Trader shows that just recently, more than 80% of utility stocks hit new 52-week highs. This is one of the sector’s most extreme momentum readings in three decades and tied for its second highest since 1990.

The following table from that same report shows just how hard it is for a defensive sector like utes to maintain this kind of momentum.

Here’s the following summary via Sentiment Trader (emphasis by me):

Across all time frames, utilities struggled to gain any amount, much less hold onto any gains that might pop up. Over the next 2-3 months, only two of the dates managed to show a positive return, and those gains were brief and ultimately erased.

The risk/reward ratio for the sector is one the worst for any study we’ve seen in 20 years. In a generally rising asset like stocks, it’s awfully rare to see a negative risk/reward ratio over a multi-month period, much less one shows as limited upside as this one, and such severe downside.

Bonds compete with stocks for capital flows. When stocks selloff, capital diverts to bonds in search of safety and vice-versa. The fundamental and technical picture still favors higher US equities, imo. A move up here in stocks should drive a reversal of some of the recent move in rates. This makes short utes/bonds a pretty good tactical short opportunity.

On an unrelated note, I’m currently working on the MIR (our monthly Market Intelligence Report). We’ll be focusing on two areas of the market that I’m most excited about; Ag and energy. There’s a number of trades to be made off these two macro themes. But there’s one that is actually a unique play on both. It’s an equity trading at low multiples of cash flow with a rock solid balance sheet and massive upside potential. I’m looking forward to sharing it with you and hearing your thoughts.

Only Macro Ops Collective members will receive access to my ag and energy trades. If you’re interested in checking them out be sure to sign up for the Macro Ops Collective by this Friday at midnight!

Click here to enroll in the Macro Ops Collective!

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.