U.S. Treasury bonds spiked higher the last week as fear rises. The flight to quality trade is back. Investors are selling equities and buying bonds. There has also been a move higher in gold as quality buy as well. The VIX moved back above 80 on the close yesterday showing the increased anxiety. Volume moved over 3 billion shares on the NASDAQ on accelerated selling the last two hours of trading. The break below the October lows is creating additional downside pressure as the bottom so many had hoped for didn’t hold. Emotions are funny animal when it comes to investing. Short term the irrational action is much like dealing with my 13 year old daughter. The current activity is creating the next short term opportunity.

A look at the various time frame of Treasury ETFs below shows the spike higher in these funds over the last week plus. The question I have is will they hold this value or give it back. I am on the side of give it back. The yield on the 10 year bond moved down to 3.14% yesterday when four days ago it was at 3.7%. That is a dramatic move for the yield to drop. Fear is an amazing emotion and one that continues to amaze me. After more than 25 years of watching and investing in financial markets the fear factor creates more opportunities than anything else. Looking at the chart TNX (10 year Treasury yield) below you see prior to this drop the trend was down. The last ten weeks an ascending triangle was being formed with an attempted break higher twice that failed. The recent drop creates a lower low and equal to the low in June 2003. The 2003 low coincided with a bottom in the equity markets. While I am not convinced this is the low for equities it could be a rally point for both.



To play the treasury short you could use ProShares UltraShort 7-10 year Treasury (PST) or 20+ year Treasury (TBT). These are leveraged funds so be aware of the additional risk and adjust accordingly. As with any opportunity there is the element of being wrong. That is why after scanning the market I put these potential plays on a watch list. So, today watch to see if the yield moves higher. Based on your disciplined strategy pick an entry point. Establish an exit or Stop which is a violation of the reason you took the play to start with failed. Finally establish a target. Know what you are trying to accomplish before you start. Enter the play from a watch list with a defined strategy, not because you read about and liked the idea. Be cautious emotions are high and irrational.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.