The Positive Covariance Between Bond Yields, Equities Is Back; Expect Both To Rise Further: We Reset The Tactical Trading Strategy Accordingly
Robert P. Balan
Managing Owner and CIO at Predictive Analytic Models / FinaTech Solutions GmbH (CH)
By Robert P. Balan, Predictive Analytic Models
Period Covered: March 22-23, 2021 (Final)
Summary
- March 22: Modest long equity positions taken out by trailing profit-stops; 10Yr yield reaches a bifurcation point at 1.6520 between falling further, or resume it's rise.
- We reset long equity positions if indexes resume the what we believed to be interrupted rally; also adding to long equity positions at downward breach of 1.6520 support in 10Yryield.
- March 23 (pre-NY open): The 10yr yield fell below 1.6500 support, but equity indexes fell as well. We start seeing a shift back to the positive covariance between yield, equities.
- Despite the breach of some support levels, there is yet no constructive evidence that yields have peaked, and are falling for good. But the positive covariance between bond yields and equities is back; we have to reset our tactical strategy, accordingly. So it does not matter immediately whether or not yields will fall further.
- The thinking is that more declines in yields will provide relief rally for equities. However, there is yet no corresponding evidence to conclude that yields are finally falling for good. We get to prove whether that is true or not, today because we have just seen what seems to be a shift in the market's tactical paradigm -- looks like the yields and equities have been trading on positive covariance since yesterday.
- Actually, There is a structural reason why equities and bond yields should be rising together, further from here: (1) the SPX climbs on rising bank reserves and increase in the Fed's balance sheet; while (2) the bond yield rises on account of falling Treasury General Account levels, which reduces the amount of debt issuance required to fund the government stimulus program.
MARCH 22, 2020
GOOD MORNING EUROPE / GOOD EVENING WEST COAST
robert.p.balanModeratorLeaderOwnerMar 22, 2021 7:45 AM
PAM BUYS 144 CONTRACTS ESM1 AT 3895 LIMIT OR BETTER, OR AT BREACH OF 3923, OCO, GTC
*This order was filled.*
*ESM1 -- DONE AT 3894.65 BOUGHT 144 CONTRACTS ESM1 SCALPERS FOR ALL FUNDS, INCL TRACKER, EIGER*
PAM BUYS 144 CONTRACTS RTYM1 AT 2265 LIMIT OR BETTER, GTC
*Please modify to:*
all PAM BUYS 144 CONTRACTS RTYM1 AT 2260 (FROM 2265) LIMIT OR BETTER, OR AT UPSIDE BREACH OF 2282, OCO, FOR ALL FUNDS.
robert.p.balanModeratorLeaderOwnerMar 22, 2021 12:53 PM
PAM BUYS 144 CONTRACTS RTYM1 AT 2260 (FROM 2265) LIMIT OR BETTER, OR AT UPSIDE BREACH OF 2282, OCO,
*This order was filed.*
*RTYH1 -- DONE AT 2282.40 BOUGHT 144 CONTRACTS RTYM1 SCALPERS FOR ALL FUNDS, INCL TRACKER, EIGER*
LowerlightbebeamingMar 22, 2021 3:12 AM
Various possible permutations of the EWP schematics of the 10Yr Yield and NDX 100:
10YR YIELD
NDX 100
TimK123Mar 22, 2021 8:00 PM
I lean towards a 4 bottom on NQ being in place too:
RM13Mar 22, 2021 12:15 AM
Delta neutral at 72% for SPY, 81% for QQQ, bullish. However, let's look where gamma neutral will be at on Monday, if gamma neutral jumps over the spot, barring Fed interference, we may see a move down..
RM13Mar 22, 2021 3:03 AM
Until Fed/treasury changes the tune, there is set up for volatility in the market Groundhog Day - SpotGamma?
wisesunMar 22, 2021 4:30 PM
Quote: The issue with this lack of hedging and extreme call positioning is that it invites a great deal of future volatility. If markets start to decline options market makers will being reducing long stock hedges that are in place against those long calls (gamma hedge). Additionally if traders suddenly elect to purchase put positions, this requires an immediate short sell by options dealers (delta hedge).
Therefore options market makers flows would turn starkly negative at a point in time when market liquidity is very poor.
So here we are, once again highlighting the risks embedded in this market due to excessive leverage, low hedging, no short positions, and a lack of liquidity.
RM, it means if market sentiment turn south, the drop will be fast and furious?
RM13Mar 22, 2021 7:26 PM
Yes, if and when market turns south, it will go down, like the action of last 3 days of January and February...
robert.p.balanModeratorLeaderOwnerMar 22, 2021 4:58 PM
*The 10yr yield heading towards a bifurcation point.-*
*Support at (basically) 1.6600 makes the yield pivot higher and could go to another higher high.*
*Breach of, say 1.6520 may see yield falling further.*
*I am giving XXX boys a conditional order to buy more ES, and YM if the 10yr yield's 1.6520 level gives way.*
all PAM BUYS ANOTHER 144 CONTRACTS OF ESM1 SCALPERS, AT XXX DISCRETION, UPON BREACH OF 1.6520 IN THE 10 YR YIELD.
User.49362576Mar 22, 2021 5:05 PM
GE, Robert. Could you share your view how falling yields would affect RTYM? Thanks.
robert.p.balanMar 22, 2021 5:07 PM
User.49362576 -- falling yields usually ignite a spread trade, which is buy NQ and Sell RTY -- the reason is that the RTY generally outperforms on gently rising yields, and vice versa.
robert.p.balanModeratorLeaderOwnerMar 22, 2021 5:09 PM
all PAM BUYS 144 CONTRACTS OF YMM1 SCALPERS, AT XXX DISCRETION, UPON BREACH OF 1.6520 IN THE 10 YR YIELD.
robert.p.balanModeratorLeaderOwnerMar 22, 2021 5:47 PM
AT 3894.65 BOUGHT 144 CONTRACTS ESM1 SCALPERS FOR ALL FUNDS
*Enough daylight between purchase price and current price of ES which is now above 3930, so we put a trail stop to make sure we make some money out of this trade.*
all PAM PUTS A TRAIL STOP FOR LONG ES (BOT AT 3894.65), SELLS 144 CONTACTS AT DOWNWARD REACH OF 3918, FOR ALL FUNDS. WE WILL SCALE UP THE STOP AS/IF THE MARKET RISES.
sparketMar 22, 2021 7:12 PM
NQ is up over 2% on the day while 10yr yield is down slightly less than 2%, but still finding support above 1.65%. It'll be interesting to see if yields consolidate at this level and NQ keeps rallying.
If that occurs, I think the EWP Lowerlightbebeaming posted could very well play out... but I'd be skeptical to see this as rally with legs beyond the 13,538 (.786 retracement of the entire move down from ATHs). Seems like a good bull trap setup while the MOTUs unload their equity holdings at the best price possible.
robert.p.balanModeratorLeaderOwnerMar 22, 2021 7:18 PM
all Modify the ESM1 trail stop to 3925 (from 3918), for all funds, GTC -- (first modification)
robert.p.balanModeratorLeaderOwnerMar 22, 2021 7:36 PM
We will use the RTY as benchmark for risk evolution. RTY has turned into the weakest index, and so it is important to watch it's upside progress.
If it is unable to rise above 2310, then its cuidao all around.
We should be able to get out of the long RTYs at breakeven at least.
LowerlightbebeamingMar 22, 2021 7:44 PM
Using point & figure percentage bullish charting, Sep 23rd bottom was at 38% and Oct higher bottom at 32%.
A no brainer divergence.
This recent correction bottom on Mar 5th was 22% with a 4th qtr earning beat of 20.3% vs 3.7% and yearly increase of 11.5% vs 3.7% over 2019.
This 2021 is expecting a 15.6% over a higher 2020 earnings.
I would only be shorting NQ for scalping to protect my long. Long term there is no bull trap for NQ but bear trap for short at bottom of 4 in a new earning cycle is the fear and pain I would avoid.
robert.p.balanModeratorLeaderOwnerMar 22, 2021 7:52 PM
all Modify the ESM1 trail stop to 3930 (from 3925), for all funds, GTC -- (second modification)
TimK123Mar 22, 2021 7:58 PM
I can see high potential for a textbook 4 in NQ, will post in EW.
ikswo123Mar 22, 2021 8:10 PM
A most simplistic data point to bring up, but could it merely some of the $1400 stimmy going into QQQ? It may be ready for a pullback but will likely be the trend thru IRA funding deadlines. I was thinking rotation early on but SPY is following too. [or all just the 10yr]...
surfinusaMar 22, 2021 8:38 PM
VIX: Open gap from Jan/Feb 2020 near 17. Observation -- On daily chart.. double bottom the past hour at 19. Either bounces to 20 and moves lower to 17 (i.e. impulses lower after small 4), or bounces much higher to 23 ish (larger flat 4 over past 3 days), then then moves lower to 17.
robert.p.balanModeratorLeaderOwnerMar 22, 2021 9:06 PM
Modify the ESM1 trail stop to 3930 (from 3925), for all funds, GTC
*This order was filled.*
*ESMI -- DONE AT 3929.75 SOLD 144 SCALPER CONTRACTS FOR ALL FUNDS, INCL TRACKER AND EIGER*
all PAM REINSTATES ESM1 LONGS, BUYS 144 CONTRACTS AT UPSIDE BREACH OF 3937, GTC, ALL FUNDS
MARCH 23, 2021
GOOD MORNING EUROPE / GOOD EVENING WEST COAST
user.52846056Mar 23, 2021 4:06 AM
Rates falling together with equity?
robert.p.balanModeratorLeaderOwnerMar 23, 2021 8:23 AM
PAM REINSTATES ESM1 LONGS, BUYS 144 CONTRACTS AT UPSIDE BREACH OF 3937, GTC
*This order was filled.*
*ESM1 -- DONE AT 3937.25 BOUGHT 144 CONTRACTS ESM1, FOR ALL FUNDS, INCL TRACKER, EIGER*
robert.p.balanModeratorLeaderOwnerMar 23, 2021 9:07 AM
10YR YIELD JUST FELL OUT OF BED!
joshweirMar 23, 2021 9:08 AM
time to buy some more sire
robert.p.balanModeratorLeaderOwnerMar 23, 2021 9:08 AM
Indeed Josh, indeed.
robert.p.balanModeratorLeaderOwnerMar 23, 2021 9:17 AM
PAM BUYS ANOTHER 144 CONTRACTS OF ESM1 SCALPERS, AT DCC DISCRETION, UPON BREACH OF 1.6520 IN THE 10 YR YIELD.
PAM BUYS 144 CONTRACTS OF YMM1 SCALPERS, AT DCC DISCRETION, UPON BREACH OF 1.6520 IN THE 10 YR YIELD.
*These orders were filled.*
*ESM1 -- DONE AT 3920.50 --- BOUGHT ANOTHER 144 ESM1 SCALPERS. FOR ALL FUNDS INCL TRACKER, EIGER*
*YMM1 -- DONE AT 32,543 -- BOUGHT 144 YMM1 SCALPERS. FOR ALL FUNDS INCL TRACKER, EIGER*
vjapnMar 23, 2021 10:32 AM
Robert, you had suspected that market may switch to down yields and down equities. Since you are buying equities, you obviously think this is transitory. Can you please explain what you are looking for to assess whether yields and equities going in the same direction is here to stay. Thank you.
robert.p.balanModeratorLeaderOwnerMar 23, 2021 10:43 AM
vjapn -- There still was no definite evidence, thereby no definite conclusion, that yields and equities will henceforth go in the same direction. What we at PAM believe in, is that banks will resume buying back their shares also resume paying out dividends. That should be good for equities. Despite the breach of some support levels, there is yet no constructive evidence that yields have peaked, and are falling for good. Yields could correct lower, and seems to be the case from here, but we have not made the conclusion of a sustained fall at this time.
robert.p.balanModeratorLeaderOwnerMar 23, 2021 11:40 AM
The thinking is that more declines in yields will provide relief rally for equities. However, there is yet no corresponding evidence to conclude that yields are finally falling for good. Therefore, it may be too soon to make the conclusion that the covariance between yields and equities has changed back to positive -- we will know for sure if we see yields falling hard, and equities following suit, and vice versa.
We get to prove whether that is true or not, today because we have just seen what seems to be a shift in the market's tactical paradigm -- looks like the yields and equities have been trading on positive covariance since yesterday.
10YR YIELD
ESM1
YMM1
RTYM1
The only exception is the NQM1 which has stabilized and ticked higher the 10Yr yield fell below 1.6600 nominal support.
robert.p.balanModeratorLeaderOwnerMar 23, 2021 11:50 AM
It may be too soon to make the conclusion that the covariance between yields and equities has changed back to positive -- but we will know for sure if we see yields falling hard, and equities following suit, and vice versa. We get to prove whether that is true or not, today.
sparketMar 23, 2021 12:12 PM
Robert, do you think there is any connection right now between the rate of change in yields and equities? The 10yr has fallen quickly and it’s almost like equities (except for NQ) are in a state of shock. Especially RTY.
robert.p.balanModeratorLeaderOwnerMar 23, 2021 12:16 PM
sparket I am still trying to understand if there has been a shift to positive divergence -- we will know soon enough.
flamarkMar 23, 2021 12:36 PM
Metals, NQ, have been syncing with bonds, RTY is being impacted by Oil.. YM and ES tied at the hip.. but that will change..
QuaziMar 23, 2021 8:23 PM
Looks like everything is falling together ... yields, equities, commodities, and even bitcoin ... except the dollar.
robert.p.balanModeratorLeaderOwnerMar 23, 2021 11:30 PM
This what may happen to the yield
Hoping to see this in NQ pricing
ES probably looking to set up a double bottom
RTY recovery --- could be larger.
SEE you in Asia
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