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Bond rally nearing an end?
- Thread starter gharghur2
- Start date
L
Lance Carson
10:30 AM
Two reliable indicators suggest that the bond market is leaning heavily on one side of the boat, suggesting a possible correction soon unless the market continues to receive a dose of weak economic news. On Friday, for example, the Commodity Futures Trading Commission (CFTC) reported that in the week ended Tuesday, large speculators (non-commercial traders) once again added to their existing record net long position, marking the fifth record in six weeks of trading. Longs now outnumber shorts by 2.5 to 1. The second indication of extreme longs is in the cash market, where in a survey by Stone & McCarthy, portfolio managers now have their highest aggregate duration in 3 years, with duration at 101.2% of bogeys (typical range is 96% to 104%). I am obviously quite familiar with the axiom, "The market can remain irrational for longer than you can remain liquid," but these indicators tend to have a fairly short lead time, meaning it is more likely than not that the bond market will soon correct. It could of course rally a bit more first; much depends upon the September data. Friday's Chicago index could be the top number of the week given the sharp reaction to the Philadelphia survey last week.
Two reliable indicators suggest that the bond market is leaning heavily on one side of the boat, suggesting a possible correction soon unless the market continues to receive a dose of weak economic news. On Friday, for example, the Commodity Futures Trading Commission (CFTC) reported that in the week ended Tuesday, large speculators (non-commercial traders) once again added to their existing record net long position, marking the fifth record in six weeks of trading. Longs now outnumber shorts by 2.5 to 1. The second indication of extreme longs is in the cash market, where in a survey by Stone & McCarthy, portfolio managers now have their highest aggregate duration in 3 years, with duration at 101.2% of bogeys (typical range is 96% to 104%). I am obviously quite familiar with the axiom, "The market can remain irrational for longer than you can remain liquid," but these indicators tend to have a fairly short lead time, meaning it is more likely than not that the bond market will soon correct. It could of course rally a bit more first; much depends upon the September data. Friday's Chicago index could be the top number of the week given the sharp reaction to the Philadelphia survey last week.
Not necessarily, those are just target levels where negative convexity wreaks havoc on their mortgage portfolios. Look at more as price levels that if we get there, will accelerate through those levels (i.e. from 4.65% to 4.55% in the 10yr within no more than two days). I lean with Lance Carson on a correction, but would buy puts instead, maybe the Nov 107 puts in the 10yr options, pretty cheap at 7 ticks, can probably get em for 5 ticks soon. Probably a lotto ticket but better than being stopped out on shorts as the mortgage flows will continue for some time (Wells Fargo only about 30% rolled into March options). Until then daytrade and intermediate-term longs should be good.
Quote from Lance Carson:
On Friday, for example, the Commodity Futures Trading Commission (CFTC) reported that in the week ended Tuesday, large speculators (non-commercial traders) once again added to their existing record net long position, marking the fifth record in six weeks of trading. Longs now outnumber shorts by 2.5 to 1.
And since that data is from Tuesday it does not include the last 4 days' sharp rally. So we could guess there are a lot more longs now.
Anyone know when exactly the data for this report is collected? According to positions at Tuesday's close, open, noon or when?
Quote from johnpinochet:
I've been wanting to go short since 108 and change. I've done consistently well as a day trader by quickly leaving the bias behind when price action indicates I'm wrong. Generally speaking a break through the highs of a rectangular period of consolidation indicate we may go higher. We've had that warning many many times since 108 and change. Heck, since 107 and change. If we keep spiking through weekly highs as far back as the eye can see no matter how much I want to be short for a position trade, I can't.
I so much wanted to go short today for a multi-day position trade...and then I re-read what I posted earlier.
From a long term perspective this market is insane. Short term intra-day I love it!
On a fair-value basis the front end is probably most overvalued. As for the long end it doesn't matter, purely dominated by mortgage flows and real money put-to-work flows, can stay out of whack for longer than one can stay sane about it. The 2yr yield is something like 60+ basis points through the Funds rate. I read in GCM that the last time this happened the Fed was easing by 50 basis points within a month or two (not exactly sure on timeline). Thus, that means the market is thinking the Fed could possibly begin easing in December/January. The Fed has prepared no one for this type of move and obviously the talk still leans to raising if they have to do so. Front end of the curve needs to come off a bit, plus they have auctions this week, would go with a flattener type trade into the end of this week, also don't forget month-end on Friday.
Quote from johnpinochet:
I so much wanted to go short today for a multi-day position trade...and then I re-read what I posted earlier.
From a long term perspective this market is insane. Short term intra-day I love it!
Well said my man, I learned the hard way last week!
I tossed the towel in @ 112 '04 and took a breather on Thursday.
It was a bad bruise, no broken bones on my 30 YR short, quite purple still. Playing intraday over here for the time being.
el surdo