Via Kevin Muir of “The Macro Tourist” fame
Another day, and another steady grind higher in US stock markets. In all my years trading, I can’t recall a non-summer or non-holiday period that has been as boring as the past couple of weeks. I mean, B-O-R-I-N-G. The ironic part of this snoozefest? There has actually been a fair bit of new information for the stock market to digest. Whether it is the recent uptick in wage inflation, or Trumpster’s “we will totally destroy” North Korean rhetoric, it’s not like the world has suddenly become less volatile. Yet day after day, tiny little stock market dips are bought, and we steadily rally, often closing up small. This is a trader’s ordeal. And it’s especially difficult for put-owning-bears like myself. Low-volatility-grind-highers are Amityville Horror type nightmares for me.
When will this end? Or is this trading’s new reality? Could it really be as simple as waiting for the 3 handle morning dip in the spooz, buying it with both fists, and then waiting for the end of day ramp?
Well, I can’t say for sure when it will end, but rest assured, it will. And when it does, it will catch a lot of traders off guard (pro tip – with the declining volatility, many traders are increasing position sizes, but be careful – when it turns, that increased leverage will bite back.)
Yet at the risk of making an even greater fool of myself, here is an idea for potential timing.
Too often, traders assume the centre of the universe is New York. Yeah, maybe some think it’s London, but it’s one or the other. Yet I contend that often the driving force behind markets comes from Beijing.
Remember the 2008 Great Financial Crisis? Most assume the market bottomed on the passing of the TARP bill. The market didn’t actually bottom until China came in with their fiscal stimulus. More often than not, China’s policy changes are what drives world asset prices.
Since this summer, I have argued that Chinese government officials will do everything in their power to ensure the upcoming Communist Party Congress flows smoothly. In May, when Moody’s downgraded China, I cautioned that the bears were getting way ahead of themselves – (China Downgrade- Buy the News?). Back then, the hedgies were all beared up on China’s prospects. Now, with the meeting just days ahead of us, most of them can see nothing but clear sailing.
Next week, China sits down to “re-elect” their leaders.
Xi will continue to lead, but make no mistake – this is an important event and he wants to ensure there are no errors or embarassments. There is little chance that China will conduct any sort of monetary or fiscal policy changes that will upset markets until this meeting is complete. It just ain’t going to happen.
In fact, they will do everything they can to “protect the quote.” Traders that have sat at a desk long enough will know what I am talking about. Often clients, or even dealer based traders with large positions, will defend a price level because they want the asset in which they have a position to not move. If they are long, they can keep the price from rising by peeling some off, and if there is some selling, they can defend the quote by buying more. They just want it to settle down.
I feel that is what is happening with China right now. They just want to get through the next couple of weeks without prices moving too much. Prices have already been goosed higher, and now it is merely a matter of keeping the quote up here.
You might feel that theory is full of sh*t, that’s your prerogative. But I think China affects markets way more than most financial pundits admit. The Chinese Communist Party Meeting starts October 18th and runs for a full week. If I am correct, that means the real market correction might still be a couple of weeks away.
I dialed the S&P 500 option chain, and the great thing is there is now a full array of weekly options. There is even a series that expires on October 25th, the last day of the plenum. The 2525 put is trading for a stupid 8% vol which works out to $4.90. One month later, the November 24th 2525 put is trading at a slightly more elevated 8.25% vol, which works out to $17.10. So if you agree with me that China will keep this market up here until after their big shingding, then buying the November put and selling the October one to earn some premium in the meantime might be something to look at. But be careful, it would be just like me to mess my market top call by getting cute and trying also to pick the timing. Talk about an arrogant idiot. Breaking the cardinal rule of forecasting – give a direction or a time, but never both!
ERIS at Interactive Brokers
A few months back, I wrote a couple of pieces about ERIS Swap Futures – As Cool as Carl and A Better Way to Short the Bond Market. At the time, the ERIS Swap Futures were not being offered by Interactive Brokers. Well, good news! Geoffrey from ERIS Exchange sent me a note yesterday to let us all know that IB is now offering their swap futures.
Gotta luv Kevin. He’s right on china.
Though it has been said that US defines the structural change and China defines the cyclical change.
So indeed, watch out for the volatility cycle to shift gears after the twice-a-decade “communist” dog & pony show in china ends later this month. (china being about as “communist” now as ayn rand, lol)
And if trump doesn’t wimp out by nominating obama’s boy powell for Fed chair and instead goes with warsh or taylor, perhaps the US fed will usher in a desperately-needed structural change to global monetary practice.
(For example, the Taylor rule would currently calculate the fed funds rate at 3.75% instead of the 1.25%)
A dovish-to-hawkish bias change at the US fed together with a China cycle change could be an awesome one-two punch to the current market complacency & prices. We can hope.