Thursday, December 15, 2011

When the fear of missing a rally is greater then the fear of losing money. DO NOTHING

When the fear of missing a rally is greater then the fear of losing money.  DO NOTHING

With the market this year making so many firsts, it never seems to end. After our Nov 29th risk off extreme post, the EUR.SPX correlation died after the swap lines were released. Gold, China and commodities got clobbered and correlation stayed very high for the index.  And out of all this global movement, SPX is in our year-end range of 1175/1225.  

PFG believes that volatility is being artificially suppressed due to the sudden need to be in anything USD$.  Money is moving back into DM from EM in the face of global risk de-leverging, that in turn is keeping USD$ assets bid creating the illusion all is well in the US and volatility is collapsing in the front, however it’s not in the back.  Infact, its almost at the year highs!

Our indicators again show us that re-risking rally could be very powerful, however if don’t see a bid into risky duration, it will be short lived.  With the SPX in our range, and not getting paid to take any significant risk, we are doing nothing.

1) We posted on Nov 29th that risk off was too extreme.  In addition, after the our euro obituary post, the eur correlation died.  This now leaves the market in our year-end range and volatility has totally collapsed in the front of the curve.  However....

2. ... money continues to de-risk out of EM and back into DM (explains the USD global bid)

2. Financials showing again up at oversold levels.  They can easily move up 5-7% in a re-risking rally.

3.  No faith in risky long duration continues.  This coincides with the steep vol curve.

the vol curve today is vs {min, max} for the year in the mid in the front half, however the long end is still very close to year highs!

4. Long/Short - same story, high correlation.  Hedge Fund returns stagnant
5. Vol using GLD and SPY seems rich and a rally could take VIX to 25 very very fast if a rally starts, however it is already cheap to current spot and we don’t expect this outcome.
(from last post, same comment, and vix is lower, graph updated)

No comments:

Post a Comment