I trade the bond ETFs–TLT and TBT regularly. I find them easy to trade and rotate back and forth based on my favorite bond indicator, the 5-day RSI. One reason I trade them is that in today’s market they signal how much risk the big traders (hedge funds, pension funds, etc.) are willing to take on, and what a powerful insight that is! Here’s a chart of TLT, watch it bounce along as if its pulled by the 5-day RSI from oversold to overbought and back again.

See what happens when it pushes passed the volatility bands or Bollinger Bands. This represents extreme short-term overbought and bonds will dance back to their MAs or value. You can buy TBT–the inverse bond ETF–for this mean reversion trade or short the futures. But this is not the real story. What the bonds are telling us is how much risk the big traders are willing to take on. In other words, when TLT is rallying, fear is growing in the market, hedgies are shorting, and rallies are sloppy and choppy. Best not to be too heavy long stock, in other words.

When bonds rush to extremes and peak, then traders are reassessing and willing to take on more risk, so back they go into the market, probably buying futures, so SPY or its derivatives are a good bet. Of course, this pattern may just be a summer thing and it will all end after Labor Day, or eventually, when the Fed decides to goose the interest rates.

One of the best insights I’ve seen lately, is a casual comment by an experienced trader that the hedge funds have large short stock positions. Other players are trying to push the futures up so the hedgies will have to cover; then the hedgies short more stock driving the market to the bottom of its range. This dynamic creates a market that is careening back and forth in a range parallel to the 200 SMA. Frankly, that heavy analysis takes more time than I have, so I just tell myself we’re just trapped by the 200 SMA in some sort of magnetic warp, and we’ll keep chopping around for awhile longer as we head into the dreaded Sept-Dec time period.