Friday, June 12, 2015

Grecian Formula

Greece has never had this much power since Alexander the Great.  Greek officials, if they were trading futures, would have made a fortune just by trading off their own headlines.  I'm sure they would have made enough over the years to pay off their debt!  Really, it is puzzling to see the market so enamored over such an insignificant issue, but it is fear of the unknown.  Fear of Grexit.  I am sure the market would make a very slight dip, and rally huge after Grexit, because it would get rid of this uncertainty, and you would no longer have a cloud hanging over the market.  I don't buy the contagion argument, because the bond markets in Spain, Italy, Portugal, and Ireland are telling you that there is no contagion risk.  Spain and Italy 10 yr yields are trading below US Treasuries.

This range bound trade in the S&P really makes it hard to trade the index, and the commodity bear market is making it boring to trade most commodities, which are stuck in tight range bear markets.  So that leaves the bond market, which is giving more action than the conservative fixed income investors want.  There are cries about lack of bond liquidity.  It seems pretty orderly to me, the only time it was disorderly was when Treasury yields spiked lower on October 15, and I am sure the Fed doesn't mind lower rates.  I doubt you have the kinetic energy in this bond market to cause a spike higher in Treasury yields, especially considering the large number of speculator shorts in the market right now.  Remember, the spike lower in Treasury yields on October 15 happened because the bond market was still leaning short at that time.

The best trading is in the bond market right now, which is fine with me.  I have transitioned away from the dull S&P futures a long time ago.

I am thinking that the Treasuries have found a bottom, and we should carve out a range over the rest of the month, between 2.30% and 2.48%.  My plan is to trade that range, the only fly in the ointment is the Fed meeting next week, where I am reluctant to be long into because it seems like with this positive economic data, Yellen will lean hawkish, which could surprise and scare some fixed income fund managers into panicking.  I think we will maintain this higher yield range for at least another month, until we get enough weak hands out of this bond market and the sellers dry out.

4 comments:

Unknown said...

Hello, I've read your posts during the past few months and earlier posts in 2009/2010, but have not read those in between. I'm curious 1) when you made the transition from SP500 emini to other instruments, and 2) besides treasuries, what other markets do you trade?

Speaking of "more actions" in bonds, I'm interested to learn if it's always like this as I'm new to trading treasuries. From your experience, do you think this is in line of historic norms? Have you noticed any changes over the years in terms of volume/volatility/market participation?

Thank you

Market Owl said...

1) I had traded commodity futures before I even traded S&P futures, so I wasn't always just an S&P trader. I did trade mostly S&Ps from 2008 to 2013, which is when I started trading Treasuries. I can say that I wasn't very familiar with Treasuries that first year, but from 2014 onwards, I watched the market everyday and looked at the events and news driving the market and it has been the main market I watch since then.

2) I also trade S&P, but not much these days, and also crude oil/natural gas on occasion.

As for Treasuries, it trades differently when it is in the middle of a panic, like it has been since beginning of May, and other times. When it is trading normal, with no panic on the buy/sell side, it usually grinds higher, much like equities. But Treasuries are much more sensitive to economic reports, and that is the big difference. Stocks don't reach much to most reports, except nonfarm payrolls. Since I've really only been trading Treasuries since 2013, I can't say there has been much of a change in volume/participation, it seems similar to what I've seen in the past two years. Volatility is cyclical in Treasuries, you get lots of volatility when stocks are going down a lot or when you have a panic like these days.

Unknown said...

many thanks for the quick reply.

other than your "My Blog List" and "Favorite Books", any blog/newsletter/book you would recommend?

Market Owl said...

No, there aren't many useful blogs, newsletters, or books out there. I learned almost everything on my own. Experience gained from careful observation of the market is your best source of education. And know yourself, and how you think. After you find an edge in trading, it is more a battle with your mind than with the market.