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Wednesday, June 27, 2012

WHAT TO DO WITH BONDS?




We are seeing a tight wind up now in the Bond market that often leads to a good sized move. The above is the COT picture which is more or less business as usual. It does show commercials pretty heavily on the short side, but that is not necessarily that meaningful when it is against a strong trend. We are in new high ground, so this is just a basic hedge that is going on, it is nothing to hang our hat on that says hey look at those insiders and how heavily they are betting on the down side. This picture does not really tell us that. In addition you can see the small specs in gray are heavily on the long side. In theory this is also bearish, but as you can see that has also been the case for the most part in recent months, and prices marched onward.

One possibility I have thrown out there which has been my consistent theme for a while now, is that we are in a long term deflationary cycle much like what Japan has been in for 20 years. I think ours is only about 4 years old. If that were too be a correct thesis, we could see this market basically go sideways for a very long period of time. Again, that is a theory, and I don't have the knit tie shy of a first down or the unkept hairdo of a Stanford or Harvard economist. The next chart is the daily.





Here we have something a little more revealing. We have a sideways ledge type of pattern called by Kevin Haggerty, a slim jim. These can break in either direction, and are momentum based trades. You go with the breakouts. Yes at times they are prone to whip saws, and often the best entries are the second ones after you get an initial fake and retracement. I have spent years studying these types of things and there really is no magic to how to trade them. They are just narrow consolidations that often have sharp breakouts. You wind up taking a leap of faith when you play them. With potential market moving news coming tomorrow, the time might be here for a move. One other way to play these is wait for a fake break out on one side, then take the opposite one on the other side. Often news stories create these types of situations. Who knows that story may not cause anything, but it comes in front of a holiday, and light volume, so I am expecting some volatility after it's release.

At the end of the day I don't know what effect their decision really has. The Law unfortunately just like trading, is a judgement call at times, and biases of those making the calls effect the decisions. I remember a replay situation involving a San Diego State football game against BYU recently, where the one official reviewing the play which could not have been a more obvious call, was affiliated with BYU! Of course he made the call favoring them, and the conference had to later apologize for his "error" to SDSU. Then they made a new regulation that disallowed this type of thing. Sound familiar?

I am leaning toward the short side as of today on this breakout situation based on some short term things not shown. Whether or not that will change after today is not known right now. Just thinking out loud, it is hard to imagine a big rally in stocks, which is what a down side break here would most likely mean. However, you have to trade what is not what you think will be.

4 comments:

Vikas said...

Hey Chris, thanks for the post, hope your hand is doing better?

Michael Tredr said...

i agree with your bonds outlook. i'm short on them at the moment but i can definitely sense that there's still a paradigm overhang that's not gonna let these things dip in a meaningful way.

and i've also been very mindful of the japan comparison and have often looked to their society and living standards as a sort of gauge to see how things MIGHT turn out for us.

speaking of theories, I'm thinking that as of last week, we're definitely in the early stages of what could be the second leg of the bull move for the overall indices. with certain commodity prices lower and a Fed that's obviously on the pro-bubble side, I'd say that that things can only go up from here pretty much ensuring Mr. President's reelection for another 4 years. Just another theory though, I also don't have the knit tie of a Hoover fellow. However, it's arguable that I have the unkept hairdo of a Harvard econ guy - or better yet a Berkeley do-gooder, without the Birkenstock sandals though, lol (although i hear they're pretty comfy).

and yes, especially in these murky times, it's often better to trade what you see instead of trade on "an idea". even though i'm short bonds, i know that i have to keep my risk profile in check and be able to trade other things should this not work out.

great post as always Chris.

Chris Johnston said...

Funny Michael

Vikas, hand better but I think I have some tendon or ligament damage here so I suspect I am going to have to have some lame surgery before this is over.

I am not a big fan of docs even though one of my sisters is a very prominent one.

MichaelP said...

With a hurt hand I can take you in a cage fight....

That really sucks on the ligament damage hard to keep those big arms when you can't work out. What a bummer.

Sell bonds.