Wednesday, January 7, 2015

Length of Pullback is Everything

Is this a 5 trading day pullback, or a more protracted 12-14 day pullback?   With the proliferation of V bottoms since 2009, these distinctions make a big difference.  If its a 5 day pullback, you have to buy now because this is day 5 of the pullback, and we could blast off in typical V fashion.  But if its a longer pullback, something we saw in October 2014, or June 2013, then you have much lower to go.  It is this uncertainty that makes it hard to predict the future.  If I had a crystal ball, knowing the time length of the pullback is more important than the magnitude.

I am leaning towards the longer pullback back in this case because we just had a short pullback in December with much more fear than this one, and the magnitude of the drops are not too different.  There seems to be a complacency about this pullback that I didn't see in December when there were worries about a Russia financial crisis due to falling oil.  Also, you had a huge amount of money being put to work by the investment community into SPY after we bottomed in December, with the equity fund flows enormous by historical standards.

Also, you cannot ignore the chicken little effect when the scarecrows get loud ahead of Greek elections in a couple of weeks with fear of Grexit.  And I don't believe oil will bounce much which will keep the energy bulls at bay.

I have changed my tune (maybe I am the contrarian signal that the bond rally is over!), I am now looking to buy bonds on the dip, instead of stocks, at least for the next 2 weeks.  Levels I am looking for are 2.03% on the 10 year for a dip buy.  I believe that bond dip opportunity presents itself tomorrow, with the usual weakness due to bond investor nervousness ahead of  nonfarm payroll numbers on Friday.   And if the equity correction lasts for 12-14 days, then 10 year yields should get to around 1.8%, or perhaps even lower.

Today seems like a counter trend day with the bounce in equities, the selloff in bonds, and bounce in oil off the lows, however meager it is.  I expect the equities to continue higher above the gap up levels at ES 2010 as we maintain the bid ahead of FOMC minutes today, as the Pavlovian response is to buy equities ahead of anything Fed related.  It worked like a charm in December, and many times before, too numerous to count.

10 comments:

Anonymous said...

Non farm payrolls are gonna be fat as signaled by ADP. Low oil means more trucking and more transporting of shit around the economy. Lack of bad weather helped as well. Jobs are definitely out there.

Fed will maintain language signaling a tightening of loose monetary policy.

Say bye bye to sub 2% 10 year yield for now. Market will bounce back to spx 2050. Oil back to 55 on this bounce.

Market Owl said...

I will probably get long bonds ahead of the non farm payrolls on Friday. The expectations are high as usual for the jobs number, and the market is set up for disappointment. I would get out of any bond shorts ahead of the number.

SPX looks soggy here, I have changed my strategy to short the rips, and we have a rip today. I will get short either at close or at tomorrow's open.

Anonymous said...

Flattening of yield curve foretells a bad economy ahead and unchanged fed funds rate in the middle of the year. Bond buyers may be right that rates won't rise in the middle of the year but they're wrong about the economy getting bad and they're wrong about oil staying low forever. I think Fed will pull the trigger in the 2H because oil will be up by then and rear view mirror will show a good 1H economy because of low oil and low interest rates causing homebuying.

Anonymous said...

ADP beat payrolls, why should NFP not beat as well. What slowed us down? Not the weather, not high transportation costs. Look on monster and craigslist. Tons of jobs available in big cities right now.

Market Owl said...

I am playing an extension on this monster trend of lower yields, it will end with a bang when stocks go back to test the 200 day moving average at SPX 1960. It looks like a one day rally and back down to more weakness tomorrow. The Germany/Greece rumors are helping to keep a bid under this market. Tomorrow should bring back the sellers.

Market Owl said...

ADP is backward looking, their forecasts are always high when you have a good jobs number the month before, and bad when you have a bad jobs number the month before.

https://twitter.com/IanShepherdson

He knows all about the ADP BS. It is nearly worthless as a NFP forecast.

Anonymous said...

Yeah but you're not looking for jobs in the US though.

Anonymous said...

See what these bitches say in about 4 minutes. It ain't over till the old lady sings.

Anonymous said...

That was a little scary, TBT went negative. I think it will base around these levels and 10 year rates also base around these levels. For a couple of days and then sell off. Bond's had a huge rally and it's not rational to expect the trend to keep going non stop. Fed did say they will raise rates. Fed always does what they say.

Market Owl said...

You are getting in deep shorting Treasuries right now. Treasuries often go up whether stock market goes up or down. Today being an example. Anyway, I think you are better off going long SPY calls than going long TBT. Its sort of the same trade, except much better odds.

I think market goes back down, and big, in the coming days. SPX 1960 beckons.