A loyal reader asked me about TBT – the exchange traded fund to short the long bond. As you may remember, I was very bullish on TBT last year; but it turned out to be one of my worst trades.

The best thing to do when a trade goes the wrong way is to learn from it. In this case, TBT serves a dual function for me – as both a potential trade as well as a leading indicator of the business cycle.

The fact that TBT took a dive provided a very strong indication to me that the economy was slowing back down and the market would turn; that was partly the basis of my cash call back in February, which has turned out to be the right call.

Today, TBT remains a technical sell. Why? The economy is softening. China continues to buy our bonds to manipulate its currency. QE2 from the Fed is not quite done. That trifecta keeps interest rates down and therefore TBT down near its 52-week low.

As to why the economy is softening, see last week’s newsletter. It’s not a particularly pretty picture right.

So I say stay in cash until a bullish market trend reasserts itself. And watch TBT as a very good leading indicator of any recovery – or Chinese yuan strengthening.

Navarro on TheStreet.com

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Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

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