Risk on - can it continue? Buy upside calls for a down move

Risk on - can it continue?
As we have been calling for a rally for sometime, the next question is can it continue?  The data is not clear, but little upside is left.  Let’s examine EM Risk, Long/Short, Financials, Yield and Vol

1. EM Risk attitude can still get more attractive, expect more inflows


2. Long Short world no longer has a clear edge, it still sits with 10% move in any direction - same story, high correlation, not working. 

3. The financials could still rally, however now that earnings are out, it is clear they should be down 50% - Financial stock ROE’s have been cut in half. Who is holding worthless CDS is also a looming question?

4. The hunt for lower quality yield continues and still has edge - this trade supports our lower long term vol thesis

5. Global Vol Levels decimated - now that no one wants it, is short term vol a buy?

Vol Risk Adjusted with Gold - selling vol has very little edge from here.

From the above data, we can conclude a a few things

1. EM Risk has room to rally
2. DM Risk will not get much further help from financials, making it hard for the index to rise
3. Long/Short trades are not screaming edge in any direction - correlation remains very high
4. Yield trades are a must and still offer edge (this has probably been slow due to the fact everyone is dumping bonds to buy stocks, it will reverse)
5. Vol in the short run is very close to fair values and getting long at lower levels makes more sense then shorting it here for a few points - buy upside calls delta hedged heavy, they will stay sticky in a down move (everyone is selling them up here)

The above points would indicate at best, this market has little juice left to rally and we are more inclined to sit and wait for a short market, short vol trade or a term structure trade to buy short dated upside calls vol and sell the back end.