Front Running, Shorting, Macro

The financial markets don't exist to fit traders' cookie cutter assumptions.  Front running is the rule, not the exception.  The weakness in stocks from Jun 20 to Jun 27 was as much a massively overbought market mean reverting as it was hedge funds front running the pension fund rebalance, which was hyped up even on Bloomberg on Jun 16, as being as much as $150B out of stocks into bonds.  That was your warning sign that the rebalance effect would be pulled forward.  Despite this, bonds weren't able to go higher, even with stocks being weaker and with no significant econ. data.  That set up the unwind trade later this week, as the hedge funds bailed out of bonds ahead of the end of the quarter, and stocks were pre-sold ahead of time by funds to cover into the anticipated pension fund selling.  It appears the pension funds pulled forward their rebalance to avoid being target practice for the hedgies. 

This week once again proves that its hard being a short seller, even in such an overbought, overvalued market.  To survive as a short seller, you either have to focus on 1) small cap retail traded stocks or 2) be like a cockroach when shorting large caps/index.  

For 1) The dumbest hands in this business is fast money retail.  The most edge is from shorting whatever stock they are playing that day.  Since most retail traders are longs, when they buy and drive a small cap stock higher on either no news or meaningless news, shorting into the strength from their irrational buys is a big edge.  Then you cover when they eventually sell at the end of the day or the following days.  Pure edge.  But scales poorly, due to small floats, but that's irrelevant for most retail investors. 

For 2) Shorting big caps stocks and the index is hard.  In most cases, you have to be on the sidelines waiting for perfect setups.  The only times you can be aggressive is in bear markets, but bear markets don't last long, and end with the bears getting their face ripped off.  So not a forgiving game.  If you want to have a chance, have to be super selective in short entries and take profits when the market corrects.  Being too greedy trying to perfectly time the bottom for covers is asking for trouble, and setting yourself up for missing the graceful exit, and being stuck short on the other side of the V bottom.  You can't short in the hole, you have to set up the short ahead of time, anticipating future weakness.  Once the weakness arrives, its usually too late to get a good short, as the first half of the selloff is where the best risk/reward happens.  You have to be a cockroach.  A survivor.  Resilient, be able to take hits, be unaffected, and go on to the next shorting opportunity. 

Lastly on trading/investing based on macro.  Its a very tough game.  It's not a long term alpha generator for most.  Its the most crowded space out there in the financial markets, so the edges are small AND long term, a bad combination.  Usually when you have to play long term, you want edges that are big, due to the extra volatility involved in long term positions.  That's not the case with macro investing.  FX is the toughest market out there.  Most of the time, especially over short to intermediate term horizons, stock indices and bond yields are hard to predict. 

Seeing a big squeeze higher today, catching the "rebalance" believers off guard.  Today is the JP Morgan fund collar trade expiration and reset day.  Those sold calls are deep in the money, they are 1 deltas and the put spreads 0 deltas.  Dealers have to replace their 1 delta short stocks position with something like a 0.40-0.45 delta combined short stocks positions as they get long calls and short put spreads.  So that leaves them with a net 0.55-0.60 delta of SPX buying they have to do by the close today, with a fund that's over $15B last time I checked.  So close to $10B of buying pressure they are adding on the SPX today. 

I am not in a rush to short, but SPX above 4450 will start to catch my attention.  From a timing perspective, probably need to get closer to mid July before I am really interested in putting on a big short.  Early to mid July is usually a bullish time period for SPX, especially coming off of a post triple witching opex selloff.