I have seen my share of big market up days, but somehow yesterday’s monster move higher had a particularly obscene air to it. No matter what the news, the market interpreted it bullishly. Even Russia’s testing of ICBM missiles did not manage to stop the drive to new highs.

In the morning I remarked to one of my business partners that I had never seen my twitter feed as “all in” bullish. There was no one that was bearish. I mean zero. Nada. Zilch. And not only that, everyone had a smug cockiness about how far stocks could run now that they have broken out.

They proved right – at least for the time being.

We have cleared the final remaining hurdle and now everyone has piled on board the train as it is pulling out from the station.

http://themacrotourist.com/images/Azure/PackedTrainMar0514.png</p>

But how long is their train ride going to last?

The bulls will tell you that the fact that the market has been able to shrug off the Ukraine news so convincingly demonstrates the underlying strength of the market. But isn’t that like playing Russian roulette and reasoning that since the last few spins didn’t result in a gun shot, the game is obviously extremely easy and poses less risk?

Even though I am old enough to have seen this play out a million times, it will never cease to amaze me how market participants perceive that the risks decrease as the price goes higher. Financial markets are one of the few areas where the demand actually increases as prices rise – not the other way round as would be expected.

We have definitely hit the point where the market participants’ greed has overcome their fear. The only fear is now the fear of missing out on he rally.

I am short and wrong. For now my other positions are saving me, but I need to remember my previous comments about the potential for a blow off top. I am going to hang tough and see what the rest of the week brings – watching for the potential for a “pop and drop”. However if by early next week we are holding above the break out, then I will have to admit I am wrong and reduce the position.


Things that I am watching…

March slump time?

In the previous three years we have experienced a remarkably similar pattern of economic activity. Each time the economy has gained traction going into the new year and each time, it has peaked in the first week of March.

http://themacrotourist.com/images/Azure/ECOSurpriseMar0514.PNGBloomberg Economic Surprise Index which measures actual economic performance versus expectations.</a> </div>

This year the pattern has been broken and the economy has already slumped.

Maybe this seasonal pattern is helping contribute to what I think is an overly pessimistic view of the economy. Or maybe the brutal winter actually did affect the economy. Either way, this year is definitely different.


VIX futures

Although I am trying to resist my urge to try to pick a top in the stock market, I couldn’t stop myself from buying some VIX futures into yesterday’s sell off.

I realize that I have argued in the past that buying equity volatility is buying protection on the previous crisis – something that is too obvious to work well. To a large degree this theory is proving correct. Have a look at the VIX chart. Even into Monday morning’s wicked selloff on the Russian’s Red Dawn news the VIX only went to 17.

http://themacrotourist.com/images/Azure/VIXMar0514.PNGVIX Index</a> </div>

However, I am still going to buy some March futures for a trade.

VIX futures contracts often trade with large premiums as you head further out into the future. The current environment is no exception and you would need a large increase in the VIX level to simply break even on later months’ futures contracts.

http://themacrotourist.com/images/Azure/VIXCTMar0514.PNGVIX Futures curve</a> </div>

Buying the September contract at 18.14 needs a 28% increase in the VIX level just to break even! But the March contract which expires into next month’s Triple Witching is only trading with a premium of approximately 1.00 VIX point.

Given the market’s frothy exuberant state, there is a decent chance that at some point in the next month we are going to get a correction which scares everyone. The 14 level has proven fairly clear support, so that is a reasonable loss level to assume if that doesn’t come to pass. At the worst I am probably risking down to 12 where it should hold even if everything goes perfectly for the bulls. On the upside, although I am not expecting a big move to 40, I could easily envision a move to 20 if the situation in Ukraine takes a turn for the worse, or heaven forbid, market participants decide that maybe chasing new highs in equity markets is not such a good idea.


Positions

UPDATE New Position: Long March 2014 VIX Futures. Conviction 2.

Short 10 Year US Treasury Futures. Conviction 3

Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively.  Adding back to the short this morning. Conviction 3

Short US 2 Year Treasury Futures. I think the downside is a move from 31 bps to 25 while the upside is a move up to 50 bps. Adding back to the trade this morning. Conviction 4

Long a tiny position of puts on TSLA and FB. Just for shits and giggles. Conviction 1. Stop – none: when they go to zero the market will do it for me.

Short Euro. Added to this trade into the recent rally.   Conviction 4

Short Nasdaq 100 futures, short Eurostoxx futures, and short Nikkei futures. Fed is going to taper until something breaks.  Conviction 3.  No stops for now

Short European stocks via ESTX50 index vs Long S&P 500. I continue to believe that the ECB is too tight relative to the Fed and the BoJ, and that this will translate into relative weakness of European equities.   Conviction 4

Short Yen.  Establish short Yen last week.  Now I will sit tight and wait.  Conviction 3

Short JGB futures. I can’t call myself a macro trader without this widow maker on the sheets. Small position for now, but will add aggressively at the first sign it is working. Conviction level: 1. No stop.

Long Yen volatility. I believe we are entering a period of increased volatility for the FX pair.  Conviction: 3

Long 30 year US treasury volatility.  Swapping half of this position into Yen volatility.  Conviction 2

Long various deferred crude oil futures contracts.  I own a variety of different expiries in years from December 2014 all the way to December 2020. Conviction level: 4. No hard stop.

Long precious metals smorgasbord. Long gold, silver and platinum futures. I also believe that the closed end ETFs (CEF.A CN Equity or PHYS US Equity) which are now trading at discounts versus years of trading at a premium are a good way to play this idea. Conviction level: 4. Using the year end lows as a stop for half the position.

Long grains. Long deferred corn, wheat and soybean futures.  Although this trade has not worked at all, I really like it long term. Conviction level:5. No stop period.

Long Ithaca Energy IAE CN Equity.  See previous posts. Conviction level: 5

Long Input Capital INP CN Equity.  I have not yet written this up, but I really like this story. More to come in coming days. Conviction level: 5