Friday, July 6, 2018

Counterintuitive Move

The jump up in the S&P 500 futures on the start of tariffs was a classic counterintuitive move.  You have a well known deadline that traders are supposed to be fearful of, and obviously, most will either be fully hedged going into that date, or have sold some of their longs going into it.  Thus, when the date finally arrives, all those who were scared of the tariffs and the escalation of the trade war have no more stock to sell.  Leaving just the strong hands holding stock.  That is why you are getting this lift higher on tariff day.  It is not what most traders expect, and it causes 1. short squeeze 2. fund managers who add back exposure to keep up with the indexes. 

I expect the market to drift higher in the coming days, we had higher put/call ratios for several days, and there was enough pessimism and weak hands taken out for this market to climb this wall of worry (trade war) again.  I am by no means bullish long term, but the trader in me knows how post-event trading usually goes.  I will consider a short once the FOMO money and shorts have bought back their stocks.  It should take about a week.  In the past, it would take a lot longer but there is such a fear of missing out on further upside that most of that sideline money will be urgent to get back in. 

It is interesting to see Treasuries are stabilizing just above 2.80% 10 yr yields.  With the continuous flattening, it is clear that the bond market is leaning towards lower yields this summer.  Global bonds are clearly back into a strengthening mode, as the Bund is back to 0.30%.  The global economy is slowing, and the US markets can only ignore that for so long before it catches up and causes Treasuries to strengthen. 

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