Yesterday I wrote about how the action was getting a little squirrelly. I noted that higher opens were being sold aggressively. Wednesday’s action proved no different, and once again, the higher open was sold hard.
S&P 500 trading for the first 3 days of this week</a> </div>
This time the selling continued all day and we finished on the lows.
Market pundits once again had all sorts of “reasons” for the drop, but in my mind, these excuses are all just grasping at straws trying to explain a bigger picture move.
It really is as simple as this: the market did not believe the Fed was serious about withdrawing stimulus. After 5 years of constant QE, the market assumed that it would continue forever and that with Yellen at the wheel of the Fed, it was even more assured. During the last couple of weeks, the market has been forced to re-evaluate these assumptions. Given the massively over stretched posturing of market participants, this means a lot of selling of risk assets.
Everything else you hear about catalysts for this sell off is just noise. Yes, at the margin the failing of the stress test from a handful of banks is bearish, but it is not like their business has actually changed from this result. And yes, the spectacular failure of the KING IPO is certainly ominous, but that is a symptom, not a cause.
The market was extremely frothy and the Fed is rightfully trying to withdraw stimulus before it gets out of control.
Do you want to know the best evidence that this was a Fed induced drop? Have a look at the 2 year Treasury yield over the past few months:
US 2 Year Treasury Yield</a> </div>
Even as the stock market has sold off, the yield on the 2 year keeps rising. Even as the tensions in Ukraine heat up, the 2 year yield keeps rising. Even as the economic releases show weakness, the 2 year yield keeps rising.
The market is in the process of re-pricing the Fed’s QE and interest rate path.
It is going to take some time for market participants to shed their “QE forever” over extended risk positions. It is not the end of the world, but we are going to be in a “sell the rallies” mode for some time to come…
Things that I am watching
Facebook leads the move lower
One of supposed “catalysts” for yesterday’s market drubbing was the Facebook acquisition of virtual reality company Oculus Rift. The market took the news that Zuckerberg was spending $2 billion on a company that is so far removed from Facebook’s primary business badly. They clobbered the stock.
I am actually quite pleased with the market’s reaction to this news. This is what should happen when an arrogant silicon valley tech CEO throws shareholder money out the window. They should punish the stock for this kind of shit. A few weeks ago I wrote about how Zuckerberg was out control and the market was incorrectly rewarding him for the purchase of What’s App.. This $2 billion boondoggle is what happens when the market does not institute any discipline. I am actually much more optimistic that the market is returning to some sort of normalcy now that the stock is reacting unfavourably to stupid decisions.
Zerohedge had a great post titled “Is This The Official Image Of The 2014 Market Top?”
Facebook’s new purchase…. WTF?</a> </div>
Short EUR This time is different (although it never is and you should probably skip this trade) and the ECB blinked. Conviction 4
Short EUR/MXN Conviction 1
Short S&P Small short position. Conviction 2
Long the 5/30 year steepener. Will add to the position in the 160s.
Short CAD. Will add through 1.12. Stop 1.09. Conviction 4
Buy TIPS short TLT spread through long dated options. Conviction 3
Short 10 Year US Treasury Futures with half of position married to out of the money calls Conviction 4
Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively. Conviction 2
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. Conviction 3
Short Mar and June 2016 Eurodollar vs long equivalent BAX futures. Conviction 3
Short Yen. 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. 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