Thursday, November 4, 2010

Good Sale – 6 Months Later?

We spend a considerable amount of time evaluating past trading decisions. Of course, with the benefit of hindsight, market moves seem obvious, but we try to keep things in context and remember what the events and circumstances that led us to execute a certain transaction were at the time. With that as a backdrop, I thought I’d go back to a bond trade from back in the spring.

The May 6th “flash crash” is almost six months old, and the panic of that day seems to have calmed. Every now and then we see additional flash crashes that occur in individual stocks but investors are generally unaware of these occurrences, or choose to ignore them. Market skepticism remains as retail investors continue to withdraw funds from the equity markets. But the S&P 500 has gained almost 7% since May 6th, and the international markets as measured by the MSCI EAFE Index have gained nearly 20% (or more using intra-day lows instead of closing prices). Additionally, the U.S. Treasury market has reversed course, with the 30 year Treasury bond down 8% since August as fear has left the market.

The reason I initially wanted to revisit that day was the trading activity that took place in our accounts as a result of the flash crash. As we watched the destruction ensue we decided to take advantage of the rapid rise in the iShares Barclays 20+ Treasury ETF (Symbol: TLT) and sell half of our position. TLT started the day around $94 per share and moved to $100 which was a move too strong to ignore. Or at least we thought so at the time, as over the next three months TLT rose to an August high of $109 per share. As I alluded to in the first paragraph, TLT has since dropped back down below $100 and is trading near the flash crash high point. Below is a chart of the TLT with the green line representing the flash crash high.

So the question remains, was this a good sale? We watched the TLT rally through August as we gnashed our teeth only to have the position give back all gains. I suppose to answer that question we need to know where bonds are going to trade. This could still turn out to be a good trade if the TLT continues to tumble and trades to 90, 80, 70, etc. Or the market could be giving us a chance to enter back into the TLT with this being a “no harm” trade for the last six months. With volatility and fear leaving the market we will have to discuss this option. Either way, I still feel this was a great trade, although this could be my “Portfolio Trader” bias shining through.