FOMC Meeting Left The Market Holding An Empty Bag; 1.00% 10Yr Yield Support Likely To Give Way, Will Hammer Equities In A Big Way

By Robert P. Balan, Predictive Analytic Models

Original article here.

Summary

• Nothing special from Mr. Powell and Co. That disappointed some RobinHooders, so the market is tanking. We reinstated short scalpers in YM and ES.
• If the long yield break below 1%, then it's completely clear, it's the MOTUs at work. If 1% level gives way, we we will see 0.9 - .88 next week.
• We reset the short equity and long TN futures positions. We will add more short equity trades, and long TN futures, once the 10Yr yield breaks below 1.00%.
• Primary Dealers may have been front running the FOMC today. Fed does not leave its PDs in the dark, as it has to provide funding if PDs are unable to buy the debt issued by the Treasury. The PDs KNOW in general terms what the Fed will do -- but maybe not the specifics.
• This model montage leads me to believe that Primary Dealers have been offloading Treasuries for a few days prior, going into the FOMC (transaction rising, positioning becomes smaller). That seems clear, but we have to ask why? And the answer was not so obvious but I believe now that they were offloading securities so they can buy those back at a cheaper price.

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JANUARY 27, 2021

GOOD MORNING ASIA / GOOD EVENING WEST COAST

robert.p.balanModeratorLeaderOwnerJan 27, 2021 6:08 AM

We may yet get that last dip in yields later today.

I hope that gives a last uptick which enables us to exit from long TN scalpers . . .

and short equities.

Slim pickings remaining on the downside -- but we will take what is offered (if offered).

Mr. TK was telling me that we have again a positive covariance between equities and Gold. So if we get to see one last dip in equities, then that may be true for gold as well.

I hope that provides enough downside for us to exit the short gold hedge.

And basing action in DXY may continue.

flamarkJan 27, 2021 1:22 AM

What is going on with RTY??

robert.p.balanModeratorLeaderJan 27, 2021 5:51 AM

flamark The 2019 Treasury Balance Model's positive covariance with the XBI change rate is the thing to watch.

The XBI is showing topping action, but the interesting feature in the chart is the positive covariance between the TCB and XBI.

robert.p.balanModeratorLeaderJan 27, 2021 6:41 AM

On NY close basis, the 10yr yield has been leading SPX, XBI, inverse of VIX for two to three days.

surfinusaJan 27, 2021 6:56 AM

robert.p.balan Thank you for the chart depicting the positive covariance of 2019 TCB vs. XBI. From TD40 onwards XBI direction seems to be in sync with the 2019TCB.

2019TCB peaked around TD195 and trended down (for a large swing) for 50 days from TD195 to TD244. However, XBI kept climbing up (to a possible peak on TD265. Should we interpret the chart as follows: 'If the covariance holds, XBI should turn down for (at least) a modest swing lower to match the TCB downtrend (of 50 days). And are we saying that there is a 70 TD delay?'.

I understand your timezone is different, so no urgency to respond.

Apologies in advance if I misunderstood the chart. Thanks.

robert.p.balanModeratorLeaderJan 27, 2021 7:03 AM

Surf -- I highlighted that because the way asset prices link to liquidity changes, in the flows -- the change rate of liquidity over time. It is impossible to compare liquidity flows and the nominal values of asset prices, so the price change rate is the link between asset prices and liquidity flows. There was a distortion in the relationship between liquidity and asset prices for most of H1 2020, and it is only now that liquidity seasonality is reasserting. Even in the covariance of assets as shown above, things started to get in sync only after July.

surfinusaJan 27, 2021 7:08 AM

Thanks. Understood. So we should be watching both lines in-sync to the right of TD265 with regards to possible price change (directional) pressure.

robert.p.balanModeratorLeaderJan 27, 2021 7:13 AM

The bond yields are most susceptible to changes in liquidity. In shares, you have the RobinHooders, you have earnings season, you have option traders trying to outsmart each other -- but after whatever hoohah that happens, equities still follow yields after a short lag of sometimes up to three days.

That is why we look to the yields for guidance. The yield moves can sometimes come down to simple things like how much the Primary Dealers are buying or selling -- which makes total sense, as they are the bond market makers.

Which tells me that the Primary dealers in past days may have been front running the FOMC decision today.

robert.p.balanModeratorLeaderJan 27, 2021 7:31 AM

This montage above leads me to believe that PDs have been offloading Treasuries for a few days now going into the FOMC (transaction rising, positioning becomes smaller). That seems clear, but we have to ask why? And the answer is not so obvious sometimes. Is it because they expect rates to go higher, or they are offloading stock so they can buy at a cheaper price? Given what we have seen so far, the off load was probably done so they can buy those back 

Remember that the PDs KNOW in general terms what the Fed will do -- maybe not specifics, but the Fed does not leave its PDs in the dark, as it (the Fed) has to provide funding if the PDs are unable to buy what the US Treasury is selling (really nice situation, that is why every bank wants to be a PD).

The tell will be what happens to the PD positioning after this weeks FOMC. If the positioning increases, then yields are not going to go higher, and vice versa.

surfinusaJan 27, 2021 7:16 AM

Couple of interesting charts that might provide a clue as to which points to use for the Fib extensions. (I know - Curve-Fitting... but anyhow)..

robert.p.balanModeratorLeaderJan 27, 2021 7:25 AM

I have the time now to check those Fib extensions, surf, and they are spot on. Thanks for this.

OK, that triangle in the yield is becoming very distinct now.

I think we will have transactions to be done by or after NY opens.

I will see you at the Europe open in a couple of hours. Gotta fill in that sleep quota. Ciao.

surfinusaJan 27, 2021 7:53 AM

GN

GOOD AFTERNOON EUROPE / GOOD EVENING WEST COAST

robert.p.balanModeratorLeaderOwnerJan 27, 2021 12:28 PM

Yields haven't broken down yet, but equities are acting as if the triangle support has already been taken away.

I hope an actual breach puts more pressure on equities, so we have have better profit potential on scalper short positions.

We have seen the breakdown of the triangle support -- and equity futures are being destroyed.

RTY

YM

ES

It does look like NQ will also drift further lower than we expected,

robert.p.balanModeratorLeaderOwnerJan 27, 2021 1:38 PM

*I don't think we have seen the low in yields, and equities, but it will help calm nerves if we now put trailing stops to the short scalpers and make sure we won't loss money on those.*

all PAM BUYS BACK 288 YMH1 TO EXIT SHORT SCALPERS AT 30,450 LIMIT OR BETTER, OR AT UPSIDE BREACH OF 30,660, OCO -- FOR ALL FUNDS.

all PAM BUYS BACK 288 ESH1 TO EXIT SHORT SCALPERS AT 3787 LIMIT OR BETTER, OR AT UPSIDE BREACH OF 3818, OCO -- FOR ALL FUNDS.

*Now, we are using Other People's Money (OPM) to finance the risk on these short trades. Couldn't be happier doing that.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 2:14 PM

XXX boys tell me we are all out of the long TNs. I will get the averaged price shortly.

all PAM MODIFIES THE EXIT THRESHOLDS OF 288 YMH1 SCALPERS TO 30,468 (FROM 30,450) AND BREACH OF 30,590 (FROM 30,660), OCO, GTC

all PAM MODIFIES THE EXIT THRESHOLDS OF 288 ESH1 SCALPERS TO 3795 (FROM 30,450) AND BREACH OF 3810 (FROM 3818), OCO, GTC

Manu.PJan 27, 2021 2:29 PM

Robert for ESH1 something not correct for the limit part ..

robert.p.balanModeratorLeaderOwnerJan 27, 2021 2:31 PM

Thanks Manu

robert.p.balanModeratorLeaderOwnerJan 27, 2021 2:37 PM

PAM SELLS 744 TNH1 CONTRACTS TO EXIT LONG TN SCALPERS/EXCESS LONG TN POSITIONING, AT 154-28, LIMIT OR BETTER,

*This order was filled.*

*TNH1 -- DONE AT 154-28.1 SOLD 744 CONTRACT TNH1 TO EXIT VARIOUS SCALPERS AND EXCESS LONG POSITIONING, FOR ALL FUNDS*

robert.p.balanModeratorLeaderOwnerJan 27, 2021 2:52 PM

We're out of the scalper ES short

PAM MODIFIES THE EXIT THRESHOLDS OF 288 ESH1 SCALPERS TO 3795 (FROM 30,450) AND BREACH OF 3810 (FROM 3818), OCO, GTC*This order was filled.*

*ESH1 - DONE AT 3795 -- BOUGHT BACK 288 CONTRACTS ESH1 SCALPER SHORTS FOR ALL FUNDS.*

flytightJan 27, 2021 2:57 PM

robert.p.balan Just an excellent piece of work last night and this morning Robert. Love it!

robert.p.balanModeratorLeaderOwnerJan 27, 2021 2:58 PM

Oh, you're doing futures now, FT?

flytightJan 27, 2021 2:59 PM

Not yet, but I can start anytime now. Watching every move you recommend. Coming soon.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 3:00 PM

OK -- what's holding them back? Been a while that request to trade futures was in the freezer, eh?

flytightJan 27, 2021 3:01 PM

I have approval.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 3:01 PM

Ok -- testing the waters.

"Ay caramba" -- if 10yr yield breaks below 1.00% RTY will kotzen.

flamarkJan 27, 2021 3:23 PM

OK "Kotzen" ? Is that Swiss?

robert.p.balanModeratorLeaderOwnerJan 27, 2021 3:25 PM

SchweizerDeutsche and high German.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 3:31 PM

We also got out of the short YM scalpers

PAM MODIFIES THE EXIT THRESHOLDS OF 288 YMH1 SCALPERS TO 30,468 (FROM 30,450) AND BREACH OF 30,590 (FROM 30,660), OCO, GTC

This order was filled.

YMH1 --- DONE AT 30,467.50 BOUGHT BACK 288 CONTRACTS YMH1 SCALPER SHORTS FOR ALL FUNDS.

*So we are completely out of short equities, and long TNs. What comes next?*

You know, I half-suspect that this decline in yields is the MOTUs handiwork. Makes me wonder. Why now, just before the FOMC is supposed to announce mere trivial changes in its statements?

Hedge Funds Are Puking Longs To Cover Short-Squeeze Losses

...as hedge funds are squeezed on their shorts, they will likely be forced to sell their most popular and liquid longs.

*I don't believe this at all. *

vjapnJan 27, 2021 3:44 PM

Robert, Why don't you believe the short squeeze correlation is not valid?

robert.p.balanModeratorLeaderOwnerJan 27, 2021 3:46 PM

Because it was preceded by large moves in the bond market. And that smells of PDs, MOTUs, if you may.

And just before the FOMC speaks.

And if the long yield break below 1%, then it is completely clear -- it's the MOTUs at work.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 3:55 PM

Or maybe, it's as mundane as this headline:

Israelis Say They Will Attack Iran If Biden Returns US To Nuclear Deal

I don't remember Israel ever making an empty threat -- this one probably is not. I hope it is.

"Israel needs to know - and fast - whether Washington plans to stop Iran’s race to the bomb or take some action to do this," the Israeli defense source said.

I believe the black (now turning gray) swans are lining up.

greg.irvingJan 27, 2021 4:04 PM

Does this mean we shouldn't be buying long?

robert.p.balanModeratorLeaderOwnerJan 27, 2021 4:06 PM

Greg -- 10Yr yield breaking 1% is not to be taken lightly. All I and Tim want to see form here is (1) See the FOMC statement, and markets reaction, and (2) we can always wait for a day or so.

flamarkJan 27, 2021 4:09 PM

Wont FOMC say "we are prepared to do what is necessary ..."

sparketJan 27, 2021 4:10 PM

RB, you mentioned a few days ago that in 2000 and 2008, market tops happened on just regular trading days when everyone expected further gains. Does the euphoria we’re seeing from retail traders look similar to what you’ve seen in previous market cycles? I’m completely shocked at what’s happening in stocks like GME, AMC, FUBO and others.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 4:12 PM

These are the new "internet" stocks sparket -- it used to be the number of eyeballs that a web site attracts -- now, it's how many times Elon Musk tweets about a stock.

That's why I never trade individual stocks. First, I am not that smart (or lucky) to deal with single stocks; (2) I still favor taking a look at what the bond markets should/or likely do in a circumstance. An index has a built in filter to idiocy, which I commit once in a while -- I can make a mistake, but the filter of large numbers often allows me to recover from that idiocy, as large markets do revert.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 4:25 PM

flamark -- that's the old standby. But you probably have noted that the Fed has turned into some kind of Grinch lately. Oh they will say we will do what is necessary, but between them and the Treasury printing money like there is no tomorrow, I believe they will be more judicious with the next printing session. Powell and Yellen cannot be doing that brrr process simultaneously, together. Yellen will do it -- has to show her mettle to the new boss. But Powell may pullback a little (at least that is what I hope).

plavacJan 27, 2021 5:28 PM

Was this stock market crash a message to the Fed to see what would happen if they changed the loose policy

john.derJan 27, 2021 6:07 PM

Powell can now look like a hero for his new administration if a wave 3 up kicks in after this afternoon.

PD's taking care of their own, lol.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 7:52 PM

FWIW -- I couldn't shake the feeling that MOTUs frontran the FOMC -- if the 1% level gives way we will see 0.9 - 0.88 next week.

We will know in a few minutes -- if that feeling is true or imagined.

robert.p.balanModeratorLeaderOwnerJan 27, 2021 8:42 PM

OK. nothing special from Mr. Powell and Co. Disappointed some RobinHooders, I guess.

*We reset the short equity and long TN futures punts.*

all PAM SELLS 288 CONTRACTS YMH1 SCALPERS AT BREACH OF 30,240, FOR ALL FUNDS

all PAM SELLS 288 CONTRACTS ESH1 SCALPERS AT BREACH OF 3745, FOR ALL FUNDS

robert.p.balanModeratorLeaderOwnerJan 27, 2021 9:03 PM

We should get a real sell off in equities if 1.00% level in the 10yr yield gives way. It just might.

nick.88Jan 27, 2021 9:07 PM

why is 1% key robert? just pyschological?

robert.p.balanJan 27, 2021 9:12 PM

Technical too nick -- that level held all yield rallies for some months

robert.p.balanModeratorLeaderOwnerJan 27, 2021 9:15 PM

PAM SELLS 288 CONTRACTS YMH1 SCALPERS AT BREACH OF 30,240, FOR ALL FUNDS

*This order was filled.*

*YMH1 -- DONE AT 30,237 SOLD 288 SCALPER YMH1 SHORTS FOR ALL FUNDS. *

PAM SELLS 288 CONTRACTS ESH1 SCALPERS AT BREACH OF 3745, FOR ALL FUNDS

*This order was filled.*

*ESH1 -- DONE AT 3744 SOLD 288 SCALPER YMH1 SHORTS FOR ALL FUNDS*

robert.p.balanModeratorLeaderOwnerJan 27, 2021 10:14 PM

I will see you guys in Asia. GN everyone.

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