As the Market Churns
We are witnessing an unwinding of the bond market, hedge fund positions are being unwound each month prior to expiration. As the bonds are sold, the prices drop, yields on new bonds increase, interest rates increase. Interestingly enough, the dollar dropped to a 2 month low against the Euro and Yen, both economies are far weaker than ours and have GDP to deficit ratios that are much higher per capita. More market manipulation?
The bond market unwind has caused a pullback in all interest rate sensitive equities. The money is flowing from bonds and interest rate sensitive equities to defensive stocks, energy, raw materials (copper, steel, wood, metals), gold and commodities options. The money is also flowing into sectors which are perceived to be "bargains" for a "run up" and then subsequent "slap down" (profit taking) by institutional investors and hedge funds. In addition, the money is flowing into equities where the institutions have hedged their bets with either long or short options, this is called short covering.
Short covering and sector rotating has been churning the markets for over 3 years now. Its a slow and deliberate methodology, which is not noticable to the untrained eye. What are the signs to look for?
One is to watch the sector advisories from the yutz wall street analysts and shill network talking heads; when a sector or stock is downgraded, it has already been beaten down like a pinata; when a sector or stock is upgraded, the runup has already occured, in both cases, too late for the small guy. These advisories are bear traps for retail (small investor) money.
Another thing to watch is the open interest and volume on futures and equities options in the various sector index spiders and holders funds. Usually, options and futures will expire where the open interest (investors) will suffer maximum pain (the greatest number of positions get burned) by being out of the money.
Back to the current market, the institutional hedgster money (smart) are unwinding their interest rate plays, have gone short on the dollar and long on the energy/oil sector/raw materials sectors and commodities. Now, the retail money (not so smart) will follow the bait into the bear trap, which leads to a another nice little runup when this consolidation (sell off) is done.
In the next few days, while the retail money funnels into the trap, the market retests the recent highs and moves past them. The dollar should rebound, bonds will be bought again (driving down interest rates) and oil will have a pullback. Its a couple of nice up days and all is well.
Then, the smart money will decide its time to pull the money off the table and take the lambs money, er, I mean profits. Just when things could not look better, we strangely see a pullback in these sectors, probably mid week, next week, and its another consolidation down and the cycle plays out, all over again over the next month. Lets watch and see.
The bond market unwind has caused a pullback in all interest rate sensitive equities. The money is flowing from bonds and interest rate sensitive equities to defensive stocks, energy, raw materials (copper, steel, wood, metals), gold and commodities options. The money is also flowing into sectors which are perceived to be "bargains" for a "run up" and then subsequent "slap down" (profit taking) by institutional investors and hedge funds. In addition, the money is flowing into equities where the institutions have hedged their bets with either long or short options, this is called short covering.
Short covering and sector rotating has been churning the markets for over 3 years now. Its a slow and deliberate methodology, which is not noticable to the untrained eye. What are the signs to look for?
One is to watch the sector advisories from the yutz wall street analysts and shill network talking heads; when a sector or stock is downgraded, it has already been beaten down like a pinata; when a sector or stock is upgraded, the runup has already occured, in both cases, too late for the small guy. These advisories are bear traps for retail (small investor) money.
Another thing to watch is the open interest and volume on futures and equities options in the various sector index spiders and holders funds. Usually, options and futures will expire where the open interest (investors) will suffer maximum pain (the greatest number of positions get burned) by being out of the money.
Back to the current market, the institutional hedgster money (smart) are unwinding their interest rate plays, have gone short on the dollar and long on the energy/oil sector/raw materials sectors and commodities. Now, the retail money (not so smart) will follow the bait into the bear trap, which leads to a another nice little runup when this consolidation (sell off) is done.
In the next few days, while the retail money funnels into the trap, the market retests the recent highs and moves past them. The dollar should rebound, bonds will be bought again (driving down interest rates) and oil will have a pullback. Its a couple of nice up days and all is well.
Then, the smart money will decide its time to pull the money off the table and take the lambs money, er, I mean profits. Just when things could not look better, we strangely see a pullback in these sectors, probably mid week, next week, and its another consolidation down and the cycle plays out, all over again over the next month. Lets watch and see.
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