Although the past week has been a tough one for US stock market bulls, there has been a surprising equity class standout that has managed to rally every day this week.

Proving that the market seems determined to make the biggest fools of the most amount of people, and despite all the dire warnings about the coming collapse of China/Russia/Brazil/commodity countries/etc…, the best performing asset this week has been Emerging Market equities.

The Emerging Markets ETF (EEM) bounced hard off the lows: – Emerging Markets ETF</a> </div></p>

This has happened as the US speculative stocks have gotten destroyed. Have a look at the chart of the Russell 2000 small cap index (IWM) versus the EEM: (in yellow) vs. EEM (in white)</a> </div></p>

Last week-end if you would have told a trader that the IWM was going to be down 4.5% for the coming week and asked him to predict the EEM return, most traders would have said the EEM would be down even more. If you were bullish and bold, you might have said unchanged. But I doubt anyone would have said up 3.5%!

This is another example of increased influence that hedge funds have on the market. The market has become so filled with pros shooting at each other that often the moves are the exact opposite of what you would expect. There is an increased tendency for everything to be fully “baked in”.

However there might be more than simply over crowded hedge fund short covering going on.

Have a look at the Australian dollar: Dollar</a> </div></p>

Australia’s economic fortunes are very tightly tied to China’s. Given all the bad news coming out of China, you would expect Australia to be hitting new lows. But it isn’t…

Also, remember all the ominous warnings about the coming China induced copper collapse? Well have a look at copper’s recent performance: – rallying this week</a> </div></p>

It is by no means strong, but it did break out to two week highs yesterday.

And the countries that are most tied to the old commodity trade seem to be rallying the hardest. The Brazilian Ibovespa stock index is running like it stole something: Ibovespa Index – the best performer yesterday</a> </div></p>

A week ago every one was so bearish on Emerging Markets. They were all piling on the “China is collapsing” bandwagon.

Although I was not nearly smart enough to recognize this as a sign of the bottom, at least I had enough sense to sidestep this bearishness.

I have been eyeing a long Emerging Markets position and this recent strength is giving me the confidence to start my position. I am going to ease into it as 5 days of straight up is bound to have a pull back. I will put on half of the position and wait for a move back under $40 for the other half.

Things that I am watching

The tourists (like me) enter the 5/30 square

My colleague sent me a hilarious tweet from this really good blogger called Ed Bradford at the FullCarry website:</p>

All I can say to Ed is touché… When hack MacroTourists like me enter the 5/30 Treasury Yield curve arena, you know it is getting crowded.

Let’s have a look at how my knife catching is working out: 5/30 Treasury Yield Spread</a> </div></p>

Not so good so far…</p>

The 5/10 spread has had even more carnage… 5/10 Treasury Yield Spread</a> </div></p>

I still contend that given the massive amount of stimulus that before this cycle is through, the Fed will lose control of the long end of the bond market. They will be stuck trying to keep the short end lower and the long end will soar.

However, I understand that this is not how it has played out in the past. Here is the chart of the 5/30 spread during the start of the last tightening cycle in 2004 (which has been so long ago, you might forget that rates can actually go up): 5/30 Treasury Yield Spread during last tightening cycle</a> </div>

The 5/30 spread continued lower as the Fed raised rates.

I believe that many market players are using this as the playbook for this coming rate raise cycle. This is why the moves in the yield curve have been so violent so far.

I think that sheer amount of stimulus applied between 2008 to 2014 will cause the cycle to play out differently. We have never had this kind of QE, and I think the playbook should be thrown out the window. But so far, I am wrong… Let’s hope I don’t lose any more fingers on the trade…


New position: Long EEM. Putting on half of the position. Will be patient and wait for under $40 for the other half. Conviction 3

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