Wednesday, June 11, 2014

Gap Down Out of the Blue

This is something we haven't seen in a while.  A healthy gap up out of the blue.  No real reason for it, just spontaneously happening in Europe.  Let's not act like what Draghi did was anything like a QE.  It isn't even close.  He is not buying any bonds here, he is just making vague threats that he could resort to that if Europe stays weak.  Which probably means he'll have to pull out the QE guns later this year, as there is very little potential for any sustainable growth in Europe, QE or no QE.  It is a moribund economy, with too much bank debt, too much social welfare, bad demographics, and not enough corporate efficiency.

It is very likely that this gap down gets bought by the eager dip buyers who can't stand to buy on an up day, but this is the first salvo from the bears, giving a subtle warning that at these prices and levels of optimism, the slightest bit of bad news can take it down.

Yesterday Treasuries got beat up and came down to the 2.63-2.65% range that I was looking for as an entry point.  I started a long position at those levels, for a longer term trade.  With the 10 year and 30 year auctions coming up, the sellers came out ahead of time to front run the auctions.  With the huge spread between Bunds and Treasuries, I expect buying pressure coming from overseas value buyers wanting to get out of European bonds and into Treasuries.

As we hang around these lofty levels, I will be on the lookout for signs of frothiness to time the top.  Getting closer, but not quite there yet.

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