Short SPY (and possibly IWM later), long US 10 year bonds (didn't put this on yet), and long German 10 year bonds. These trades require one to have a long time horizon and I am nervous about the timing of the former trade. Even people who are agreeing with me that this is a bear rally scares me. I know I am right about the future direction of the equity markets, but one does not outperform when others agree with you.
So on Monday, I expect the market to open lower and that would be a good time to by 10 of NAV of XLP and 5% XLY. These are short-term hedges to the SPY short (i.e. SPY short should not be considered a hedge to the SLP and XLY longs) and I believe XLP would decline less during a dramatic sell-off when compared to SPY. I also expect most short term traders would buy on Monday to give the bear market rally more steam. These are regretably, trades, as I plan to dump them as SPY hits new local highs by the end of the week. The timing is done to reduce risk that the longs would offset the gains in the SPY short. The trade is risky because I love the SPY short, and those long positions would not allow one to realize the gains in the SPY short because one is using a "market-neutral" strategy.
I would not add to my short position yet. I'll let the market move against me initially.
Edit: copper will rise today, but it will sell-off on monday.
Edit2:
Go long on XLP (10%) and XLY (5%) today. I think market will open higher on Monday. Copper will probably rise on Monday. Gee... this diary is forcing me to criticize myself and vacillate.
The copper positions have to be closed. Take the damn loss at $2.12 (3.5%) because I could imagine a scenario where it could go higher. You're wrong, and just admit it. (I am talking to myself). It could go higher than its recent high of $2.20. Sterling will be closed at loss on Monday. Short copper might be attractive position if the futures curve is in contango as it was backwardated recently. Short oil seems to be good too. I'll keep silver long though.
I expect the bullishness to continue. I am a short term bull now, but this market is stressing me out. It is forcing me to think like a trader and contradict myself.
I'll use bond and commodity market indicators as proxies for bullish sentiment in addition to equity technical indicators. It is much like organic chemistry: how do you interpret these peaks? (a reference to IR and NMR spectroscopy) What does the market tell us and what is priced in? I should look at the futures curve in base metals and see if it is in contango. Contango can be interpreted as inflationary expections/and or a sign of economic recovery. I like the 5 year bond yield as another indicator since it reflects investors' estimates of their return on investment for that period of time. It is currently at 204 basis points. It should at least break the Feburary 26 highs of 207 basis points, although 220 basis points would make a short position in SPY more attractive. Also, the spread between TIPS and the bond of the same maturity can be used as a nice inflation expectations indicator. (The 10-30 year bonds might have a catastrophe premium to it such as pricing in hyperinflation or a debt default which could explain the extreme steepness of the yield curve.) However, TIPS have a liquidity premium attached to it as the market is less liquid, but I expect liquidity would increase in this market (at least for the short term.)
The commodity market at least has some hedgers in it so it conveys some useful information. The bond market, unlike the equity market, has a higher barrier for entry. Bond traders have longer time horizons, and the market is not dominated by trend following traders. There is also less upside in the bond market, so they are not motivated by status concerns such as wanting to brag about a position that went up 100% at a cocktail party.
No comments:
Post a Comment