BENEFITING FROM THE MARKET DIVERGENCE…
By Surly Trader
There are certain times when the markets just seem to disconnect. Right now that disconnect is between the US dollar, US interest rates and US equities. Since the end of November we have seen a growing disconnect – primarily between equities and other asset classes (see figure 1).
Is it strictly related to money flowing into US assets regardless of what they are, or is the market setting itself up for a large correction. Seems to me that one side of the equation is going to get hurt by a reversion to normalcy. At this point, who are you going to place your bet on – bond buyers or equity buyers/vol sellers?
Some ideas to bet on a reversion:
- Short equities, short 20+ year treasuries
- Long volatility, short 20+ year treasuries
Sizing the trade is the tricky part…
6 Comments
I would definitely NOT short 20 yr Treasuries at this key point when EU is trying to rollover and refinance over $200 billion in Sov debt. If the Italy 10 yr auctions go poorly, then just watch the flood of money pouring into US Treasuries, including the 30 yr. There is perhaps a 25% risk of deflation here, and long treasuries, and long USD, are perhaps the only way to protect yourself against that risk. Disclosure: Long TLT for 5% of assets.
The only thing in favor of shorting Treasuries is that Bill Gross has just taken the opposite position, and he has been wrong for a whole year. I wouldn’t take this risk, though. Shorting is dangerous business because you can be right on the long term trend, and short term movements can still make you bankrupt.
So Bill Gross was wrong for “a whole year”, but he was right for the entire decade before that, and he was the Morningstar Fixed income manager of the Decade from 2001 thru 2010. I’ll give his some cred since he was right for 10 out of the last 11 years. How do you think his mutual fund became the biggest one in the world, at 240 billion?
“Sizing the trade is the tricky part…” I have a suggestion that may want to be considered. Apply technical indicators that work a on variety (at least 14 different markets over decades) and apply it to the “spread” and see if it works over the last 30 years. If so, apply it and let it’s “risk” determine the “sizing”.
I’ll size that one at zero, I’m all cash. Looking for a trend and that’s not a trend yet.
@ Larry: Good PIMCO marketing to financial advisors =D
Might be time to purchase some puts in TLT. 30D avg vol > current vol.