2 days ago we talked about why US treasuries were cheap (both on an outright basis and on a relative value basis vs stocks). While I make no prediction regarding the direction of the stock market (Tyler @ zerohedge gets all the credit for that), US Treasuries have outperformed both on an outright basis as well as on a relative basis vs stocks from Tuesday Dec 18, just as we thought they would. On the blog we talked about using the bell curve and market profile to determine the best location to buy US Treasuries to leg into this trade, and yesterday afternoon / last night we got our perfect buying location (132-03 / -04 in ZN).
given the new 132-12 local high in ZN overnight...the bottom of the 1st bell curve is now 132-03...so that's where I will try to get long
— govttrader (@govttrader) December 20, 2012
So that's all history now...what to do next?
While I expect US Treasuries to outperform stocks and continue to rally up through month / year end, that doesn't mean i want to just stay long and expect treasuries to move up vertically. Like everything else in the markets, nothing moves in a straight line. My bias is now to be either long UST (buying on dips) or flat (sell pops). There can still be some value in getting flat UST on pops, and then re-buying on dips, but we must be careful to watch how much volume trades in the screens so we don't miss the coming undersupply condition (the rare instance where we do get vertical price action after a large buyer asserts their position). The bell curve and market profile will be our guide for these levels. I'll be updating thoughts on these ideas and levels on the embedded twitter feed on the blog.