Monday, 11 May 2015

Not out of the woods yet.

I too looked at that bund chart and thought 'typical spike exhaustion sell off'. The rebound amidst a mood of 'get me the hell out of here’ makes a perfect CTA market bottom.

CTA weighting has been a large component of this turndown in Bunds. If they were the only players in town then the next move should be higher especially when we have the oil tanker of the ECB bid still around. You could argue the ECB is grateful having profit transfered from the CTA bin to ECB bin via the better transfer price.

But there are a couple of other background issues. First is that many feel that bunds 'should' be pricing 75-100bp yields and the second is how 'out' did real money get on that move. I am not sure, as on one hand volumes were huge but on the other their belief is that Bunds are a good hold for all the reasons they were buying them since Jan. Apart from price, have they had any BIG reason to change their minds other than all the reasons that I have for selling them. They didn't agree then so why should they now? From the comments about short Dax being used as a hedge against falling bunds by many funds I assume they are still long.

If we look at that chart again and see where we are relative to two weeks ago we see we have only countered two days worth of drop so we are not out of the woods yet, even if mood is trying to say we are. Which in the psychological game is dangerous and translates in the Elliot wave picture into wave Bs.

The bounce in bunds was reflected everywhere with the JBTFDers  (Just Buy The F’n Dip) gaining courage across all assets. This has been helped by the euphoria from UK based traders as the UK election results are 5 bells in a row for business and private growth.  Oil has turned lower too and once again oil stocks led oil. They weren't going up in the last days of the oil rally this week. Oil then turned 4/5 bucks lower also showing a move back from the reflation trade and added to the mood.

So we ended the week on a high which was amplified by the weekend press, which heightens my concern for a turnaround lower again as though the case for a bounce is indeed good, the asymmetry of payoff has me thinking it may well be worth hanging in a bit longer to the short bonds/bunds trade as euphoria wanes and a lower chance of a major dump again outweighs the higher chance of a smaller rally.

As for US markets, I still see them as a side show to Europe which appears to be leading. Not a surprise as now that ECB is in QE mode it is trying to wrestle with controlling the whole of the yield curve serpent, whereas the US is now holding it by the tail (short end) having released its actions on the rest of the curve (stopped QE). Letting go of the long end does leave it free to whip around but not as much as the shocks you can experience when releasing a completely pinned snake as we just saw in Bunds. China rate cuts are probably just short term noise too, though stimulative China policy is unlikely to hold Western bonds.

I am trying to pick causality from correlation but with longer term rates still massively up from a couple of weeks ago, despite the bounce, cross infection possibilities to equities are still high. I have moved my FTSE shorts (losses psychologically nursed as the relatively small cost of a lifestyle hedge against Labour/SNP running the UK) into Nasdaq shorts. It’s been a while since I shorted Nasdaq, 16 years to be precise. No this isn’t a brag, though I made on it I shorted too early and felt pain - just like my recent Bund short. Yet Nasdaq has the hallmarks of a market that can be tipped by a forced deleveraging. All that cash bleeding hope funded by Venture Capital  borrowed money. As we all know it’s leverage that kills and unles you have broken through the ceiling ( Apple et al) the rest of it is lottery ticket stuff where the price of your lottery ticket goes up the more people buy lottery tickets.

Not easy from here.

Afternoon update - So much for US not leading. It looks as though USTs have taken over the reins as the bond selling does indeed pick up.  There has been little effect so far on my newly favoured contagion short but judging by how USTs and Nasdaq have run together over the last 5 day of stress there might be a gap to fill here.

Red - Nasdaq
Green 7-10yr USTreasuries

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