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

[nooby_mcnoob]

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.

I think you are right in your analysis. But when does anyone cash out? Is S&P the new overnight repo?

One thing for sure is I'm going to start scripting a download of the fed balance sheet. Not because it will make any difference to me but because it will help me understand the past. And I want to catch these basterds when they change something without announcing it.

 

[INFLUENCER]

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.View attachment 215669

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.

Thank you Real Money, this is something I am going to need to learns more about and start paying attention to as well. I apologize for my lack of fully understanding, but I can see that the blue line represents the S&P and I'm guessing the white line represents actual bonds but I was a little uncertain on the red line. The red line the result of however you inputted the 72% bond allocation in your model right? So essentially you are paying attention to the red line more so than the white line? I will do some research on this myself, but if you wouldn't mind helping me understand reading it or understanding just a little bit better it would be much appreciated.

So I see in your model that when the red line dropped in line with equities in mid September, equities started to sell off, however I don't see how it correlates in early November. And as of current it looks as if the red line is heading lower or the spread is getting larger between equities and bonds.

Sorry man, I really appreciate your advice either way and if this is just something that I need to research more on my own I completely understand. There is just so much to learn in regards to analyzing charts and the correlation between different assets.

Btw, what software do you use to do your charting and put your models together? I just signed up for a trading view pro account so I'm thinking I could probably use that to do something on the lines of what you do. Thanks again for what you have shared so far either way.

 

[INFLUENCER]

Great info! We just have to collectively figure out the best signals to watch for in order to maximize on the remaining bull market gains and also the best signals to watch for to really capitalize on the correction when it comes, as well as different ideas on the best ways to do so.
I have some ideas, such as out of the money calls on leveraged inverse ETF's such as SPXU. This fund loses value slowly when the S&P goes up, but pumps up quickly during a correction (take a look at last December for example). Although overall I'm a novice compared to most of you guys so I'm sure there are better ways that I would love to learn about as well.

 

[nooby_mcnoob]

I think you are right in your analysis. But when does anyone cash out? Is S&P the new overnight repo?

One thing for sure is I'm going to start scripting a download of the fed balance sheet. Not because it will make any difference to me but because it will help me understand the past. And I want to catch these basterds when they change something without announcing it.

Did this here: https://www.elitetrader.com/et/threads/developing-spartan.329462/page-32#post-4983325

 

[Real Money]

white line...red line...what software do you use?

The chart formula is in the top left corner. It's ThinkorSwim.

This formula

8000*/UB + 200*/ES

gives you the cash value of 8 contracts Ultra Long T-Bond Futures AND 4 contracts ES futures. This is roughly 2.1 million dollars.

So, it's a synthetic portfolio with about 1.5mm in bonds and 650k in S&P 500.

I'm just using it as a reference to get a very general idea of what a book of stocks and bonds is doing. Funds allocate like this to reduce the portfolio volatility (the two assets are inversely correlated).

If this allocation mix starts to turn up it means that a 'conservative' portfolio is starting to perform well. Fund managers will try to allocate to this kind of a mix. (I think it's because it's less risk and therefore less expensive to hedge.)

This is all just back of the envelope stuff that I use to track what fund managers might be thinking.*****

I have seen them trading off this chart though....

When it starts to turn down, they might sell both stock and bonds at the same time!

So the white line is the value of the portfolio (roughly $2.1m) and the red line is just a 150 period rolling linear regression (inertia study) in ToS. (it's a 4 hour chart so one-hundred and fifty 4-hour bars are used in each calculation of the red line).

*****I look at many things at the same time, VWAP charts, spreads, arbitrage markets, and all kinds of comparison charts. You can see them in my other posts. It's all there.

 

[Overnight]

My end-of-year speech to myself (Well, first one over the years of this thread)...Follow along below...

-----------------------------

The trade war is long over, yet I must not forget the reasons why I sacrificed so much, for the cause of profit.

The cost of trading, can be high...

But...

Sometimes it's too high.

You know, when I changed my trading plan, it was to save my account from extinction...

But I never answered the question...Why?

Why, am I, as a trader, worth saving?

I still trade badly, over greed, revenge and anger...

And I still visit my frustrations on the forum...

I refused to accept the responsibility for a market gone wild. Like I did this year with the swings.

I decided I knew better, and turned against it. But I comforted myself with the knowledge that it wasn't my fault, not really.

I cannot establish a plan, and then walk away from the plan I have created. Sooner or later, the day comes, when I realize I cannot hide from my own creation.

 

[Overnight]

Final 2019 update from last post detail. (It was light trading because of the holidays, but boy the opportunities were there.)

My resolution tonight is to switch back to mini live, and not be a terrible trader. After all, this is terrible trading, right?

 

[Overnight]

Update since last entry...

Trying to wean myself back to minis...It's been a rough go. Still not trusting myself.

The final NQ entry was one of those times when my feelings that the market looked "shaky" actually turned out to be true, got out with a tiny profit at peak of RTH....

And there's that haunting 70+% profitable number again. Beyond bizarre. I am now relegating it as just a fluke or something.

 

[schizo]

If one of those two dotards tweets something even remotely bad about trade, like, "we have changed our mind" on something, the markets are going to cry foul and drop a bunch. It has happened too many times before for me to feel safe with a swing. It really really sucks, because the world economy wants to keep driving north.

Those two might be "dotards", but what about the market? Are they so friggin' naive to believe everything those two say at face value? The answer is clearly no. But they push up the market anyway and, in my mind, knowingly pushing up the market on false information is MANIPULATION.

 

[Overnight]

A sad week of no effort...

This parabolic move north has my nuts so twisted up in confusion that as a bull I can no longer think straight. At this point any TA I know to use is suspect (I remember Feb 2018). The farther up NQ keeps heading with no pullback, the greater the pullback will be. Someone in another thread mentioned that if we can get a decent correction in the next month or so (and hopefully it is 20% rapidly), we should have a nice rise until mid-summer.

I agree with that conclusion.