Larry McMillan’s TLT-HYG Trading System

In 2010, I mentored with Larry McMillan, author of Options As a Strategic Investment and blogger for Cboe. One of his trading systems for SPX was based on a ratio between TLT and HYG. It’s really simple and suprisingly accurate.

The concept: Measure the trend of “safe” bonds vs. “risky” bonds. To measure which way the balance of opinion is moving, divide the price of TLT by the price of HYG.

During times of panic, traders rush to safety and the ratio of TLT:HYG rises, reflecting traders buying “safety” and disdaining “risk.”  When that trend reverses, preferably off a spike peak, the hypothesis supports a buy signal for equities.

Conversely, when the ratio is trending downward during times of “risk” and then reverses upward, that would be a sell signal for equities. When backtested, sell signals were timely for intermediate-term market declines.