Diary of a Financier

From the Trading Desk: Portfolio & Market Update

In Capital Markets, Trading Desk on Wed 13 Apr 2011 at 09:08
  • SPY daily chart to retest $125 in a confirmed ST bear trend if MACD makes a bearish cross.
  • With uncertainty swirling around the Fed’s policymaking & government shutdowns, how can the VIX remain at these lows?  VIX even fades the DJIA posting higher sigma, three-figure trading sessions.
  • Margin Debt at levels only seen before tech bubble & the recent credit crisis. Given low interest rates, it may continue to increase, but it’s the reason for the bigger intraday moves in equity markets recently.
  • My new long volatility position is VXZ, target $59.50 with $54 stop.
  • Closed ACI long position due to deteriorating chart & the full-discounting of our thematic thesis.
  • Bonds are the master of the universe, and AGG says QE is faintly hindering bond prices, if anything.
  • Equities will be the biggest loser in absence of QE & it’s hard to negate a bond rally.

Much to write home about this week.  I’ve made a few tweaks here and there in the Portfolio, so I thought I’d provide a summary of what I’m seeing.

Our cash position is up to about 30% now as I’m not liking the action from the S&P 500.  To update the last SPY chart I posted on March 11 (a chart that kept nagging me):

SPY daily- we have a failed double top, with both MFI & MACD having broken support in the last go-around. Indicators are already headed lower, but a bearish MACD cross would be my clear confirmation of a new bear trend.

With MACD about to confirm a short-term trend reversal upon a bearish cross, I’m not psyched about the next few weeks in equities.  I see the first support at $125.   The weekly SPY chart, however, still looks rosy, so I’ll withhold any long-term opinions.

Fundamentally, I can’t resolve how there exists such uncertainty over the future of policymaking (e.g. government shutdowns, the end of QE2, the Fed’s succession plan and the quantifiable impact of its stimulus in the first place), yet VIX resides at a lowly 16 print.  That price-range is below the historical norm, approaching modern record-lows.  Perhaps we’re in a phase like 2006, where investors trust the Fed to support equity prices.  Said David Rosenberg yesterday:

Debit balances at margin accounts skyrocketed $20.7 billion in February.  Only two other times historically have we seen leverage rise so much so fast and both times it was during a manic phase – during the tech bubble of the late 1990s and the credit bubble just a short four years ago.

Margin Debt at Broker/Dealers

Now, remember that margin is being extended at unprecedented low interest rates.  I’m having clients ask for a line to pay their taxes, cash-out their home loans, etc.  I’m used to financing non-purpose loans with an 8+ handle on the rate, but I’m able to access 4% for the smaller stuff now, 1-2% for the mid-tier.  Regardless, that leverage in the market is dangerous, and it’s why we’re not seeing 10-30 point per day moves in the Dow (.DJIA) like days of yore, we are seeing 100-125 point per day swings again like 2008.  When, I caught myself expecting the “Invisible Hand” of the government to swing in yesterday and save the day like the good ol’ Great Moderation, I felt vulnerable enough to pick-up some downside protection for fear of irrational exuberance.

I chose to buy Medium Term Volatility (VXZ), which boasts a pretty bullish chart:

VXZ daily- indicators all confirm the bullish bottom. MACD crossed and about to attempt a breakout above zero; stochastic & MFI strongly bullish. 3/21 gap to fill up to 59.50 too.

The VXZ weekly chart is also substantiating the bottom, as its stochastic is about to bullishly cross up. VIX ETNs are not the best long-term vehicles as they’re eroded by tracking error & contract rolls.  VXZ, however, is a better tool than its ST counterpart VXX.  Further, as long as the underlying index (VIX) is bullish, it’s a worthy position for hedging’s sake.

We also closed our Arch Coal (ACI) long on the April 6th failed intraday reversal.  The chart really fell apart after failing to breach its Fibonacci resistance for the third time:

ACI weekly- Fibonacci resistance holds for a third time.

ACI daily- topside momentum & trend is waning; indicators to test support.

ACI very well may trade down to first support around $32 where I’ll reevaluate renewing the position.

The lost momentum told me that our “Japan’s nuclear energy woes and the renewed coal demand” theme has been priced-in for the time being.

As any wise old bond guy would tell you, the bond market is the master of the universe.  While the equity market sometimes slips or skips out of rhythm with the tune, the bond market is the most powerful predictive force in financial markets.  What is the bond market saying?

PIMCO’s Bill Gross is short US Treasuries.  His rival, Jeff Gundlatch, predictably disagrees with Mr. Gross’ prediction of a rising rate environment:

But, as far as I’m concerned, the Fed barely bought in the 10-year space:

(By the way, that might be the most important chart ever.)  So while that 10-year yield (.TNX) chart might serve Mr. Gundlatch’s argument for the long-end of the Treasury curve, I’m concerned with the bond market.  Using the Aggregate Bond Index (AGG) as my proxy, here’s what I see:

AGG v. TNX- the impact of QE1 & QE2.

Mr. Gunlatch is quite right about the correlation between QE and rising 10-year rates.  But as for what the bond market says: QE1 had little net effect on AGG, which inched up only +0.62% over the 15 month QE1 purchasing period.  Similarly, AGG has lost -0.95% to date since the QE2 purchasing began.   QE has had little effect upon bonds–if anything, it seems to have faintly hindered them–although it’s hard to say what would’ve happened void of the stimulus.

I’m also amazed at how bonds seemingly make no move in between the announcement of QE programs and the actual inception of Fed purchasing.  There’s no expression of investors’ expectations or anticipation.

The real reaction can be found in equities, where QE’s effect is powerfully effective and where I expect the absence of QE to be most noticeable.  It’s also hard for me to negate a pro-bond outlook, given all I’ve discussed.

I can envision the liquidity leaking down Exter’s Pyramid.  The Power Money, Power Currency Illusions & Broad Currency Illusions are fully subscribed, so I don’t see continued rallies there.  It’s not like the end of QE2 will extract liquidity from Derivatives & Miscellaneous Assets, but individual investors may reallocate to more secure ground-levels, like Bonds.  Study this as a guide for what to expect:


  1. […] are taking about equities “climbing the wall of worry” lately.  While theirs is a relevant concern, I’m ready to retire the phrase by filing it away with the “new normals,” […]

  2. […] at the overlay of VXZ v TLT, I almost wish I had initiated my long volatility hedge by going long, long-dated Treasuries: TLT v VXZ- daily price […]

  3. […] the matter and the more opposition I cross, the more conviction I gain.  Here’s an excerpt regarding my stance: PIMCO’s Bill Gross is short US Treasuries.  His rival, Jeff Gundlatch, […]

  4. […] complacent traders would grow dangerously anxious.  Further, using history as a guide, I’ve noted that while bonds have reacted to action (like purchases), equities have reacted to announcements […]

  5. […] finger on the trigger with this one.  I entered the long vol position with VXZ for two reasons: to hedge a portion of the risk in our 42% long equities, and to buy cheap [mispriced] volatility.  Well, our […]

  6. […] the leverage in the system unbeknownst to almost everyone—which is exacerbated by the fact that margin balances at Broker/Dealers (mostly a cash market concern) are already back at 2000 & 2007 […]

  7. […] the move started even further in advance of QE2′s end than the analogue dictated. I fully expected that, and I caught the entire rally from bottom to top. (The leads & lags in these analogues […]

  8. […] last two days. Technically, I like the position after Wednesday’s trades. It’s not the cheap volatility I accumulated as an outright trade back in April, but VXX will protect our portfolio from continued […]

  9. […] two weeks of the 2011 high, I noticed the mispricing of risk (SPX technicals led me to cash shortly thereafter): “Fundamentally, I […]


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