Thursday, October 16, 2014

Market Waits for No One

There goes my 2015 playbook.  The bond bus has left the station.  I had it all mapped out in my head.  We were going to get one last final blowoff top in US stocks and it would be the most exquisite opportunity to get long bonds and short stocks since 2007.  Well, that didn't quite pan out.  What I was thinking was an early 2015 story has been pushed forward into now.  There is no turning back.  The genie is out of the bottle.

The charade of higher prices begetting higher prices, performance chasing, TINA, and desperate corporations trying to pump up their stock to maintain earnings growth is over.  I hear the usual explanations about there being an absence of enthusiasm at the top last month, and in July, about people hating this stock market.  Well, I was there in 2007, there wasn't a lot of enthusiasm for stocks as we were hitting the top in the early summer.  In fact, back then, everyone was into housing, not the stock market.   It doesn't require enthusiasm like a 1929 or 2000 to get a big bear market.  We got one in 2007-2008 without enthusiasm at the top.

I've learned a few lessons in my time trading.  One of the most important ones is that you can't predict both timing and price for entry, so you better choose one or the other.  I used to believe that price was everything, that if you get in at a good price, it covers for a lot of bad timing and some near term drawdowns.  I've changed my view on that, because holding through a near term drawdown wears down the psyche, which can cause bad trading.  Now I am more flexible in terms of exchanging a better price entry for a higher degree of certainty of a move happening within a shorter term time frame.

It is in that view that I believe that this bond rally will have serious legs over the next few months.  I can imagine a 1.40% 10 year yield in 2015, or perhaps even lower.  The reason I have such a high degree of conviction on this play is because we've already been to those levels before, when the recovery was less mature, and we were still in an upward trajectory.  Now when you are facing a potential recession, near the end of an economic recovery, you can get explosive moves lower in yields, something like you are seeing with the German Bund, where 10 year yields are at 0.77%.  This is because the central banks are willing to take drastic measures to support the economy, and their best way to do that is to buy bonds and lower yields.  QE4 is not so far away.  ZIRP forever.

The flash crash up in bond prices yesterday was historic.  Too many historic moves are happening over the past few years.  We had a flash crash down in stocks just 4 years.  We've had various flash crash type moves in gold and copper in the past couple of years.  The algos are relentless, and it exacerbates volatility, but usually towards the pain trade side, the side where most speculators get killed.  That is obviously an up move in bonds.

I missed much of the move lower in yields this year, in the 2nd half, although I nailed a big portion in the spring time.  I kept thinking that bond holders would panic as we got into 2015, thinking a rate hike was imminent.  I was completely wrong on that.  However, if there is money to be made, I will make the trade, even if its not at the best possible price I could have entered at.  That trade is to get long Treasuries.

The stock market is topped out, but I will still try to play for bounces, because other people are.  That means they will be willing to buy for a trade, but not for an investment.  Which leads to short 1 day bounces that can't even last into the next morning, like you have from yesterday to today.  Those looking for those common V shaped 10 days straight up rallies will be disappointed.

It is a different market now, one where bonds are now getting respect, since they've been the Rodney Dangerfield of the financial community for over a year now.  Stocks are not a STFR, not yet, but bonds are definitely a BTFD, without a doubt.  BTFD has left the building.  The NYSE building.  It has moved over to the Treasury pits.

Looking for reflexive buying in the morning on the big gap down near strong support levels, around the April lows.  After that, we may get a weak 2nd half of the day, as opex forces kick in on lower prices.


Anonymous said...

QE 4? Should we wait for equity to move up or there is a chance of sell down regardless?

Market Owl said...

I believe instead of a rate hike in 2015 as many expect, I expect QE4. I have no idea how they will package it this time, but it will probably involve buying more Treasuries, of course.