Friday, July 1, 2011

Just when you are not expecting it...a tale of two trades and one result - pending fireworks

Trade A

Well, well, well...that was an interesting maneuver. Somebody desperately needed or wanted to get out and/or get most people looking short treasuries and forced money out of the bond market yesterday and they did so again today. (I smell a significant leverage induced european banking insolvency which needed raise cash and close its leveraged bond positions and corresponding hedges including equities...I am sure we will find out more about that over the next few weeks) Of course the technical patterns in bonds had been weaking for a while now...but regardless of that, there is not a direct reallocaton that should directly drive equity prices or risk assets due to that occurrence...however, when you are leveraged trading other peoples money, who cares about things making sense or being rational... Got money...spend it, why don't you...or so it goes. The reality is that, given the looks of things, this is abut to get VERY interesting...although "interesting" may not be the right word exactly. The 30 year bond is about to trigger long and may likely follow through on my post from earlier today and take the yields much lower than the previous lows. I am, at this point, more intruiged by this scenario than I have been before largely due to the radical behaviour of market participants which in the end amounts to what I think is a trap.

Trade B

Then there is the other trade. Every trader and their mother has been preparing to short the end of Q/E. Q/E ended if you did not recall yesterday. Is it really like market participants in the know, to allow a bunch of rookies to short the end of Q/E without testing their metal? So, this week amounted to the required "gut approved" stamp often required to make money. I think a lot of people bailed. As I indicated, my system added back sizable new short positions this yesterday and, I can not be accounted in that group though I am certain to be counted in some other marginal group somewhere for this trade. However, I think that it is entirely ridiculous to think that the end of QE would allow so many traders to short on anticipation of it without having their conviction tested.

The results

I certainly "misunderestimated" the prospects of the 200 day moving average for a bounce. However, I did not have equities short exposure since I had covered earlier. I felt like Friday last week and Monday this week were make or break times for the market and highly precarious. I was wrong and I wish that I had not been. However, it is better to be careful or and considered than to be oblivious.

In the end what did we accomplish? Well we got all sorts of money losing managers trumpeting BS on CNBC and we got a totally unconsolidated rally that recovered what took two weeks to take down in roughly three days. That is NOT conviction its panic. Moreover, the reality of the situation is that there are a ton of things defective about the panic. Oil is in the middle of a catastrophic breakdown which will likely take it below 20. It is simply retesting the broken resistance right now. Silver and gold are being liquidated as are many other commodities and silver is likely on its way well into the single digits next year with a stop in the teens this year. However, this liquidation condition will spread to all risk assets...While the SP500 rose 100 points on Firda the Russell could only manage around 2 while the US dollar closed flat despite the ridiculous move in the equities and weakness in commodities. As you may be aware, I am long the dollar. You may find this post of interest The Australian Dollar has bounced allot but printed a bearish pattern that will likely trigger a cycle short signal early next week into a trending move down. Put/Call and VIX are reflecting very poorly on the prospects for this move. Additionally, there was precious little volume. A look at the EuroDollar contract (not the currency - the rates contract) shows a failure pattern setting up there too - that could have significant implications coming up. Everywhere I look this thing reinforces the defects. So, just when no one is looking for down - that's precisely what they are going to get. Its not going to be pretty either.

I will post charts this weekend...just wanted to get this update out. Till then the video below is a must see by Miall Ferguson (I posted his Ascent of Money documentary recently) and discusses just why what everyone expects from the US is not likely the real story.

Here is the Ascent of Money - a great documentary
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