Diary of a Financier

From the Trading Desk: Trade Reconciliation (Weeks of October 10 & 17)

In Capital Markets, Trading Desk on Sun 23 Oct 2011 at 21:42

My worst fears realized, SPX broke above its trading range (1220 resistance) at then end of this week.

Recall my admission from October 8:

I’m still concerned that the safety trades of Treasuries, USD & Volatility (TLT/UUP/VXX) are all overbought for the coming week. Yet, I can’t bring myself to buy stocks that’re buoyed by the hope of sheeple.

The stakes have grown too high for me. Despite my confidence in the short-term technicals, they’re at odds with persistent bearishness of longer fractals. They’re at odds with the analogues. They’re at odds with common sense & risk management. I cannot bring myself to ramp-up my equity exposure to capture 8% upside reward vs. 12% downside risk–not when I intend to make money in the downdraft, then pickup merchandise at historic discounts.

So, that’s where I stand, a mere 22% long equities with equal high yield bond exposure, some investment grade corporates, 6.5% MBS (MBB) and cash. I’ll continue to stay disciplined, as I’m on record (throughout this Diary) as mistrusting any rally on this side of Euroreckoning. Since the prospects of QE3 and US EPS growth were all part of my expectations since June, the fundamentals have not changed. Broad recognition of these conditions have raised the floor for US equities, however.

I penned an important entry on Friday, in which I mentioned a interbank market that’s remained obstinately bearish despite the windowdressing of Eurocrats. In reviewing various asset classes this weekend, I can see where the real traders play. From each rung up the food chain–equities to corporates to sovereigns to FX to interbank–I find less noise, less schizophrenia. Nothing too surprising or novel in that, but given the recent divergence among these markets, the note is prescient.

~~~~

I know I’ve cited “short covering” before to describe the bottom to top oscillations in SPX since August. At this point, when SPX has shot out the roof of its trading range, you have to wonder if short covering remains a viable excuse. Judging by NYSE short interest as of October 1, I cannot discount the attribution:

NYSE Short Interest (10/01/2011)

NYSE Short Interest entering October exceeded all other periods dating back to the SPX 666 lows of March 2009. With SPX at around 1150 this time around, I’m comfortable asserting that the short covering can continue, but I’m still not willing to open any positions on this side of Euroreckoning.

~~~~

Suffice to say, no trades to reconcile this week…

  • $VECO bought at 27.00. Trading 1.75x cash, sh repurchase in 30-40 range a stabilizer. ST buy signal fm technicals. Oct. 10 at 1:26 PM
–Romeo
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  1. […] Through weeks of Eurorumors, we’ve been able to behold the pyrotechnic spectacle of short covering in all markets, a parenthetical victory for the […]

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