The stock market has had an amazing recovery since the March lows. The key question here is can the market keep rallying? Or is it time for a pause?
Yesterday, I made the observation that the VIX has retraced to an important 78.6% Fibonacci level from the recent low to high.
Tuesday’s market action was potentially decisive for the short-term outlook.
First, the VIX reversed off the support level I highlighted. Looks like the gap fill on the VIX will have to wait a while longer:
The Nasdaq and indeed all of the major indices started yesterday’s session stronger, before reversing and closing on their dead lows for the session.
The gap fill on the Nasdaq is close enough for government work 😉
Another chart I want to highlight is this one, courtesy of @Macrocharts.
It shows that bond speculators have piled into the largest SHORT position in 30 year Treasuries IN HISTORY.
Similar positioning lead to some of the biggest bond rallies of all time.
With so much hope built into markets. With so much riding on (rapid) economic recovery, reflation and faith in the Fed…if markets do go back to risk-off/deflation it could trigger a painful unwind indeed.
Bonds have spent more than a month in a sideways consolidation (I’m tracking bonds using TLT – the iShares 20+ Treasury ETF)
they look poised for a move higher now, with yields on 10-year Treasuries potentially hitting zero this year.
To answer my initial question – the probabilities favour at least a pause in the rally here.
I know, “The Fed! The Fed!”
But the thing is, the stock market – well, the Nasdaq – has moved up in a straight line over the past six weeks. Markets never move in a straight line for ever. I’m not saying the move to the upside is done at this point. It may be. Or we could be headed for a minor pullback on the way to higher highs. Price will tell us in due course.
RIght now I am positioned quite defensively. I’m long TLT, long GLD and long puts in IWM and IYT. I also have a few long positions in stocks that are reporting earnings over the next few weeks.
I hope this helps. Good trading!
So, basically, you are “market neutral” in regards to the S&P 500 (S&P 500 VIX retracement to the 78.6% level and range-bound SPY in the last weeks) and long in bonds (with the expectation that further Fed intervention will rally the prices/lower (even more) the yields?
By the way, what is your intake about gold and why puts on IWM and IYT, rather than trading the ETFs?
Cheers!
Thanks Joao for your great questions. In terms of my equity exposure yes, I am about neutral in terms of long vs short exposure. Bonds (via TLT) and gold (via GLD) remain in uptrends and I’m maintaining long exposure to both while these trends remain intact. They are both defensive longs which will tend to beneft if there is a broader risk-off move in markets. I have puts in IWM (the Russell 200 ETF) and IYT (the Dow Transports ETF) to hedge my long exposure. I am hedging via the Russell and the Transports (rather than S&P / Nasdaq) because the former indices have been clear laggards and I expect them to continue to underform if equities weaken. I hope this helps!