Weekly Comments for November 9, 2015

Number of Views: 1210

4 Comments

I find that writing these weekly comments carries more risk of crystallizing a trading bias than does writing daily comments. A weekly comment carries a longer-term view and of course a directional opinion. It is not that easy to shake this opinion and revert positions when a new event occurs. For example, ahead of the ECB announcement of Oct 21, I was heavily short as my previous weekly analysis had "demonstrated" that markets would probably go lower... and they did moved slightly lower until Draghi spoke.

I covered most of the short positions as markets proved me wrong, but I had a hard time turning long.

You can see below that the switch from short positions (in red) to long positions (in green) was rather slow.

The trades colored in yellow are mostly failed tentative trades destined to catch a new trend.
As you can see, yesterday I tried a short TNA and then a 1/2 long TZA (because TNA shares were not available anymore for shorting.)

The TNA short trade was based on the fact that the Cumulative Ticks were showing a strong negative divergence to IWM. With the coming rate increase, I felt that small caps would be more at risk than large caps.

As you can see below, the smaller section of the S&P500 is under more pressure than the largest 250 stocks. This bolstered my opinion regarding small caps, but still, I had to cover these tentative short trades.

The 10 largest stocks that make up the Mammoth sector even attracted money on Friday. This is not a sign that markets will fall any time soon. Anyway, the MF pattern feels very different from that of last August.

Friday's story is that the market is convinced that the Fed will raise rates.
Hence, we see much rotation from Interest sensitive sectors into energy and tech.

This move was correlated to a strong US$ (versus all other currencies) and of course weak Treasuries.

Why Energy?

My first question is why energy? Oil still looks rather weak.

Except for drillers, all the energy linked sectors attracted money on Friday.

Even the weakest: shale oil bounced up (in terms of MF) as if these stocks had suffered enough and were ready to bounce. But the issue with this sector is the low oil price and the high level of non-performing debt. Did that change on Friday? I do not think so.

XLE is also showing "resilience" here (XLE is mostly the large caps oil integrated: CVX, XOM, COP, etc.)

You can see below that CVX reversed at around 10:20. (I took CVX as merely an example.)

You also can see that both the Russell 2000 and the emini reversed up only minutes before CVX.

This points to a large orchestrated liquidity move, which forced everything higher (including the forced covering by shale oil short sellers.)

REITs.

Let's now switch to REITs. This is an interesting group of stocks to analyze, because in a rate reversal environment, REITs and defensive sectors (utilities) should be under heavy pressure. This is indeed what we can see.

But if we look at the largest REITS ETFs (VNQ and IYR), a very different pattern emerges: weakness is being bought.

Very liquid REITs such as KIM and PLD seem to also attract good money.

This defies logical thinking. Of course, we can all come up with arguments such as the Euro carry trade or the rotation out of US Treasuries. Anyway, it is very difficult to be heavily short in such an environment.

We can however still invest in stories, such as Hillary's Biotech campaign story, but even IBB's negative character seems to be changing. (This is why I covered half my short Biotech.)

Foreign market ETFs

Finally, here are a few foreign market ETFs:

South Africa: UP

Brazil: UP

Latin America: UP

Aren't these regions and countries supposed to fall under the strong US$ bus?

The Chinese ETF is also UP.

Only Canada seems down.

The VIX

The VIX does not show much protection-seeking.

Conclusions:

The markets and especially the big money seem to defy logical thinking...
Maybe better to forget logical thinking and just buy weakness?

4 Comments

gapcap1 - 11-08-2015, 01:29 PM

I was long es since 10/21 and finally took profits this past Friday at 2093.00, after stubbornly refusing to cover (even a portion) of my longs above 2100.00 (see "endowment effect"). While still bullish long-term, I went home short es (from the close) and long bonds (with a 6 tic lead) on the premise that the rally in equities, and the sell-off in bonds leading up to the payrolls, had already discounted the number. While payrolls itself is bullish the economy/equities and bearish treasuries, it doesn't mean the market has to price the fundamentals immediately. Or, as Keynes said, it's not about picking the prettiest girl, but rather who you think everyone else will pick as the prettiest. Fundamental expectations have changed and all the markets need to adjust, which is why markets may still be in the clearing process. Therefore, I don't feel comfortable initiating a multi-day long position, quite yet.

We are entering the "softest" part of the month, which is merely suggestive and not predictive; but when ES is overbought going into employment day, the next 5 days tend to be bearish (67% of the time, for an average of -10.3 pts, with a z score of -1.85). This statistic suggests the markets need time in their search for equilibrium, especially after an important economic release that exceeded expectations by so much.

Of course, the bulls will argue the payrolls number proves the economy is growing; but the bears will counter with the pace of the fed tightening cycle will not be as gradual as promised, and subsequent dollar strength will inhibit u.s. exports and inflation.

The bonds relationship to equities and especially the u.s. dollar is stretched, and a nagging divergence between equities and high-yield credit continues to exist. The gross short position in treasuries jumped by 87.3k contracts, the most since March 2011, to 570.9k. The bulls pared back, cutting 10% of gross long position or 41.3k contracts to 406.6k. since the end of the reporting period, the December 10-year note fell a full point. The net short position jumped to 164.3k contracts from -35.6k. It is the third week of net Treasury shorts, and the sixth straight week the SPX closed higher on-the-week.

I hate to fade the equity drift or the smart money in bonds, but I can't ALWAYS be long the spx.

Reply

77seas - 11-09-2015, 05:13 PM

Thanks for sharing the statistics on market response following NFP days. We have seen that even on October when on NFP day, SPX reversed strongly from a highly oversold situation (just the opposite of what happened this time).

Would you be able to share this analysis?

Is it not that we are observing the stock- bond normal correlation restored since both bond yields and SPX have been rising together. Where have you observed any divergence?

Thanks again

Reply

gapcap1 - 11-10-2015, 04:42 AM

Originally Posted by 77seas

Thanks for sharing the statistics on market response following NFP days. We have seen that even on October when on NFP day, SPX reversed strongly from a highly oversold situation (just the opposite of what happened this time).

Would you be able to share this analysis?

Is it not that we are observing the stock- bond normal correlation restored since both bond yields and SPX have been rising together. Where have you observed any divergence?

Thanks again

the divergence was between hyg /spx

Reply

Pascal - 11-10-2015, 07:08 AM

Originally Posted by gapcap1

I was long es since 10/21 and finally took profits this past Friday at 2093.00, after stubbornly refusing to cover (even a portion) of my longs above 2100.00 (see "endowment effect"). While still bullish long-term, I went home short es (from the close) and long bonds (with a 6 tic lead) on the premise that the rally in equities, and the sell-off in bonds leading up to the payrolls, had already discounted the number. While payrolls itself is bullish the economy/equities and bearish treasuries, it doesn't mean the market has to price the fundamentals immediately. Or, as Keynes said, it's not about picking the prettiest girl, but rather who you think everyone else will pick as the prettiest. Fundamental expectations have changed and all the markets need to adjust, which is why markets may still be in the clearing process. Therefore, I don't feel comfortable initiating a multi-day long position, quite yet.

We are entering the "softest" part of the month, which is merely suggestive and not predictive; but when ES is overbought going into employment day, the next 5 days tend to be bearish (67% of the time, for an average of -10.3 pts, with a z score of -1.85). This statistic suggests the markets need time in their search for equilibrium, especially after an important economic release that exceeded expectations by so much.

Of course, the bulls will argue the payrolls number proves the economy is growing; but the bears will counter with the pace of the fed tightening cycle will not be as gradual as promised, and subsequent dollar strength will inhibit u.s. exports and inflation.

The bonds relationship to equities and especially the u.s. dollar is stretched, and a nagging divergence between equities and high-yield credit continues to exist. The gross short position in treasuries jumped by 87.3k contracts, the most since March 2011, to 570.9k. The bulls pared back, cutting 10% of gross long position or 41.3k contracts to 406.6k. since the end of the reporting period, the December 10-year note fell a full point. The net short position jumped to 164.3k contracts from -35.6k. It is the third week of net Treasury shorts, and the sixth straight week the SPX closed higher on-the-week.

I hate to fade the equity drift or the smart money in bonds, but I can't ALWAYS be long the spx.

That was a great trade indeed! I also like to hold winners, almost always for longer than I should!

By the way, now that the 20DMF is working in RT (the 2.5 minutes of delay issue has been solved,) we have been testing the "predictability" of the S&P500 price on the base of the 20DMF pattern on small time intervals. We have some preliminary interesting results, but the "predictability" is no longer than 30 minutes. Not sure that this can be turned into a trading advantage.

Pascal

Reply