...And They Have a Plan. (Live.)

[nooby_mcnoob]

Look at this chart. This is UB vs ES. The left side is the cash value of a 1:1 spread long short.
View attachment 215644
The spread is the pink colored one, the white thing is something proprietary.

You can see that computers are trading this thing. It traded higher during the session.

The rate / index spread tracks cash flowing between the stock and bond markets. The two markets are violently competing with each other. Massive amounts of speculation going on.

Here is the thing. Obviously, speculators don't like to lose money. So, when the spread starts running, traders will liquidate. But, some of the participants are just hedging risk, so they're trying to take advantage of favorable prices to hedge.

Favorable prices happen when speculators get stopped out, or are forced to cover shorts.

Look at this chart of the closing session...
View attachment 215646

The orange circle is where the market is being pushed lower by HFT and risk on/risk off speculators

(hedging cash equities exposure/unwinding bond hedges).

It's causing reverse cash and carry arbitrage!

But, they are in control of the market. (they have the best execution algorithms....)
so they can take the pressure off and look what happened.

The green circle is the short speculators getting forced to cover. It pushed ES up to 3229.

It shows you that the smart money is unwinding their rate futures and aggressively hedging recently acquired equities exposure.

This is a game that very few traders are adequately prepared for. The smart guys know what they're doing. This is all really complicated so don't try to understand all of it at the same time.

I enjoyed reading this. And won't pretend I understood it all but definitely was the impetus to start looking at the rates markets.

I guess it's easier to control ES since it's a future and not an index. But why does SPY/SPX follow exactly the same trajectory on intraday? Who is the boss here? I suppose theoretically unless there is some change in future expectations that ES would trade slightly differently for a period of time. This is probably a dumb question and I should be banned.

 

[Real Money]

...easier to control ES...why does SPY/SPX follow exactly the same trajectory on intraday? Who is the boss here?

This all has to do with funding rates, interest rates.

The market, as a whole, does the following because it is the cheapest way to manage risk.


Sell rate futures and liquidate bonds, receive cash, buy stock, (sell calls/buy puts) and sell index futures.

They will be forced to do this if bonds are selling off and equities are rallying.***

In reverse.....

Buy calls/sell puts, sell stock, buy index futures, receive cash, buy bonds and buy rate futures.

They will be forced to do this if bonds are rallying and equities are selling off.


SPY, ES, and SPX (NQ and NDX and the rest of them) will all trade within a no arbitrage range, but then they will spread out when HFT is facilitating huge volume.

If they are buying equities and selling index futures at the same time, and ES shorts are being forced to cover...then cash and carry arbitrage (HFT) will occur (ES hits ATH!).

Basically, retail is trading against a team of institutions (JPM, UBS, Merrill, Goldman) and their HFT facilitators (Virtu,Citadel, Peak6, etc.) in order to make sure that whatever retail participation does occur will help their cost basis within the regime I described above.

They almost always win. Retail can make a lot of money trading indexes, but the group I just mentioned will use all of their advantages against them.

They know the total book, Level I,II,III, and every inter-market and arbitrage spread. They even know all of the inter-bank quotes and recent positioning, institutional sentiment...

They have real-time swap, repo, cash treasury market and all of the relevant datas to track net flow across every market! They know their own client books as well.

(Dozu88 talks about the forward earnings yield spread vs 10 year)***

P.S. Sorry to hijack your thread Overnight. Good luck with the MNQ and NQ trading.

 

[Overnight]

...

P.S. Sorry to hijack your thread Overnight. Good luck with the MNQ and NQ trading.

It is not a hijack, yer cool. My thread is just a journal to foster ideas. The discussion here is illuminating to many people, and does not detract from the thread. I do not mind if you wish to carry on these discussions here. I like to keep my journal on track with the premise, on trading and people making money by understanding bits. I just won't let it turn into a B1S2 deal.

Carry on if you wish. Heh.

 

[INFLUENCER]

This all has to do with funding rates, interest rates.

The market, as a whole, does the following because it is the cheapest way to manage risk.


Sell rate futures and liquidate bonds, receive cash, buy stock, (sell calls/buy puts) and sell index futures.

They will be forced to do this if bonds are selling off and equities are rallying.***

In reverse.....

Buy calls/sell puts, sell stock, buy index futures, receive cash, buy bonds and buy rate futures.

They will be forced to do this if bonds are rallying and equities are selling off.


SPY, ES, and SPX (NQ and NDX and the rest of them) will all trade within a no arbitrage range, but then they will spread out when HFT is facilitating huge volume.

If they are buying equities and selling index futures at the same time, and ES shorts are being forced to cover...then cash and carry arbitrage (HFT) will occur (ES hits ATH!).

Basically, retail is trading against a team of institutions (JPM, UBS, Merrill, Goldman) and their HFT facilitators (Virtu,Citadel, Peak6, etc.) in order to make sure that whatever retail participation does occur will help their cost basis within the regime I described above.

They almost always win. Retail can make a lot of money trading indexes, but the group I just mentioned will use all of their advantages against them.

They know the total book, Level I,II,III, and every inter-market and arbitrage spread. They even know all of the inter-bank quotes and recent positioning, institutional sentiment...

They have real-time swap, repo, cash treasury market and all of the relevant datas to track net flow across every market! They know their own client books as well.

(Dozu88 talks about the forward earnings yield spread vs 10 year)***

P.S. Sorry to hijack your thread Overnight. Good luck with the MNQ and NQ trading.

Interesting perspective, seems like you really have a deep understanding of the market Real Money.
I have been a Bear for the past 6-months now and have been getting crushed on my options plays that would have paid off big on a correction or crash. After coming to the realization that the Fed will not let this market crash, at least for now, I am switching gears to the Bullish side for the near-term at least. Given what the Fed committed to the Repo market or "Not QE" $500B earlier this week, and how the markets have reacted since, would you assume it is pretty much a guarantee that this pump will continue at least up until mid-January? And if so, what do you think if anything could prevent it or cause a sell-off? I know you can't give financial advice, I am just interested in your opinion on the subject. Thanks in advance for any feedback.

PS: Also anyone else feel free to throw their perspective in as well if you would like.

 

[Real Money]

Given what the Fed committed to the Repo market or "Not QE" $500B earlier this week, and how the markets have reacted since, would you assume it is pretty much a guarantee that this pump will continue at least up until mid-January?

Well, I don't like forecasting the market.

But, if I am to look at something that will tell me what the institutions are doing then I look at a book that is spread between bonds and equities. I use a 72% bond allocation as a reference. If this book starts to turn bullish, then equities will come under serious pressure. Especially since bonds sold off so much since the SEP highs.

Here is what it looks like.

It's up to you to decide whether this is bullish or not. In my opinion, it is bullish. But, that's not to say that the book couldn't take another leg down into the range of the lows in mid SEP and early NOV.

If it does, that means all-time-highs in the indexes into JAN 2020.

At some point, this book will have retested the previous lows, or just taken off.

When that happens, equities will have a correction.

 

[HobbyTrading]

Interesting perspective, seems like you really have a deep understanding of the market Real Money.
I have been a Bear for the past 6-months now and have been getting crushed on my options plays that would have paid off big on a correction or crash. After coming to the realization that the Fed will not let this market crash, at least for now, I am switching gears to the Bullish side for the near-term at least. Given what the Fed committed to the Repo market or "Not QE" $500B earlier this week, and how the markets have reacted since, would you assume it is pretty much a guarantee that this pump will continue at least up until mid-January? And if so, what do you think if anything could prevent it or cause a sell-off? I know you can't give financial advice, I am just interested in your opinion on the subject. Thanks in advance for any feedback.

PS: Also anyone else feel free to throw their perspective in as well if you would like.

2020 will be an election year in the US. This could result in "financial incentives" by the current government in a bid to get reelected. Which would provide more support to the equity markets, for a longer period in 2020.

 

[nooby_mcnoob]

2020 will be an election year in the US. This could result in "financial incentives" by the current government in a bid to get reelected. Which would provide more support to the equity markets, for a longer period in 2020.

You're not kidding. I'm still trying to figure out how the money flows, but if you look at this, there appears to be a correlation between Fed purchasing more bullshit mortgages ($16 billion worth in September alone) and the market.

Since the drama with JPM was proven to be legit (they began providing liquidity again recently after getting some concessions on reserve requirements if memory serves), this seems to me to be some sort of quid pro quo. WHERE ARE THE UKRANIANS ON THIS. Note that this is not the repo thing, that was temporary and related to JPM showing the Fed how they can fuck the confidence in the economy.

I'd like to know who they bought that 16 billion in mortgages from.

The market is manipulated but it seems to be completely transparent how it's done.

 

[nooby_mcnoob]

You're not kidding. I'm still trying to figure out how the money flows, but if you look at this, there appears to be a correlation between Fed purchasing more bullshit mortgages ($16 billion worth in September alone) and the market.

Since the drama with JPM was proven to be legit (they began providing liquidity again recently after getting some concessions on reserve requirements if memory serves), this seems to me to be some sort of quid pro quo. WHERE ARE THE UKRANIANS ON THIS. Note that this is not the repo thing, that was temporary and related to JPM showing the Fed how they can fuck the confidence in the economy.

I'd like to know who they bought that 16 billion in mortgages from.

The market is manipulated but it seems to be completely transparent how it's done.

View attachment 215670


View attachment 215671

My guess is that they don't unwind this, ever. The mortgages will stay on the balance sheet until they are paid off or defaulted.

 

[themickey]

Interesting perspective, seems like you really have a deep understanding of the market Real Money.
I have been a Bear for the past 6-months now and have been getting crushed on my options plays that would have paid off big on a correction or crash. After coming to the realization that the Fed will not let this market crash, at least for now, I am switching gears to the Bullish side for the near-term at least. Given what the Fed committed to the Repo market or "Not QE" $500B earlier this week, and how the markets have reacted since, would you assume it is pretty much a guarantee that this pump will continue at least up until mid-January? And if so, what do you think if anything could prevent it or cause a sell-off? I know you can't give financial advice, I am just interested in your opinion on the subject. Thanks in advance for any feedback.

PS: Also anyone else feel free to throw their perspective in as well if you would like.

Let's pretend you are dumb money.
What have you done recently which is significantly different to make you assume bullish is the right call?
Am not interested in the call, but the change in your trading style.
Because if your beliefs were wrong and nothing has changed other than an opinion, then nothing has changed.

 

[Real Money]

My guess is that they don't unwind this, ever. The mortgages will stay on the balance sheet

I'm gonna seem like a genius or put my foot in my mouth here but here is my take on this....

The FED purchases were just "liquidity injections" and the MBS/ABS were just the easiest way to inject that cash. It's essentially a cash infusion to mitigate an unexpected increase in regulatory required reserves. (credit crunch froze up credit markets, this would have caused serious problems for entities who need to refinance continually)

The banks are constantly rolling over debt portfolios and extending credit to counter-parties that need to do the same.

Also Fannie, Freddie, Ginnie, FHA, VA and the rest were gonna be called on for mortgage default risk in orders of magnitude above what was anticipated. Markets were in free fall....

The FED became "the lender of last resort" when the shit hit the fan vis a vis indexed credit derivatives........these are instruments that allow institutions to make markets on credit instruments (CDO, CDS, MBS,ABS, CLO)

This is all about regulated reserve requirements for US bank chartered institutions.

Re the REPO rate. I'm def not the guy to do this analysis, but here goes....

Read this article
https://www.wsj.com/articles/how-the-discount-window-became-a-pain-in-the-repo-market-11574337601

"Banks have all but abandoned the Federal Reserve’s discount window...."
and
"[cash] hoarding has drained liquidity from other parts of the market, contributing to a cash shortfall that roiled overnight-lending markets..."

I don't know enough about the intricacies of bank financing to really say more than the WSJ.

One thing you have to remember is that these banks (Morgan, Goldman, Citi, etc.) are trying to beat each other on earnings. They are pushing the envelope in terms of total invested funds (non reserve activity). This means less free cash to meet reserves, and so they will basically just keep money and not lend it via repo market.

Also remember that the repo market is not small. They do single orders in the hundreds of millions to billions. If the whole banking system starts to lean on this then things could get out of hand LOL.

When Bear went under they needed billions in immediate cash and they couldn't get it because the street knew they were going under. I'd say this is not the case today.

This is a story about the too big to fail banks needing more liquidity because they are getting aggressive in the markets.

Look at these levels in global markets. It takes cash get the S&P to 3250! Global markets are sucking up cash, and risks have to be hedged.