Surviving The Market "Flash Crash"; Why There Will Be No Yield Cap Control In 2021, Even In H1 2022

By Robert P. Balan, Predictive Analytic Models

Period Covered: Feb 22-23, 2021

Original article here.

Summary

• The PAM community rode out that market "flash crash", removing siort hedges after the markets bottomed; we reset long equity futures trades, for a swing higher, short-term.
• High-tech (NQ) lags the value sector (YM, RTY) due to Tesla being hammered. Nonetheless, ES 's uptrend should start pulling up NQ soon, after yields stop surging.
• Yields are sideways bound, so moves in high-tech futures (e.g. NQ) are responses to what is happening to individual high-tech stocks. Problem is, the beat down pulls down other indices.
• Yield Cap Control (YCC) is a non-starter this year, or even the next (2022). Let me show you why. As example, after the Pearl Harbor attack and war was declared, the US committed to a 3/8% rate on T-Bills. It also put a cap on long term rates at 2.5%. There was reverberations of this floor-and-cap monetary policy, and the Fed, after a while, opted to raise the floor on bill rates.
• Why? Given the cap on yields (floor on the bond price), these long term securities were as liquid as bills. Nobody wanted to hold bills, if they can help it. Short-term paper had the added onus of very short term shelf life, aside from the low yield. In 1947, nobody held any bills, except the Fed. Raising the bill rates did not do any good. The YCC was abandoned after raging inflation broke out, and was followed by a recession in November 1948. Lesson: YCC is an inflation disaster waiting to happen.

FEBRUARY 22, 2021

GOOD MORNING EUROPE / GOOD EVENING WEST COAST

Order filled.

robert.p.balanModeratorLeaderOwnerFeb 22, 2021 7:51 AM

PAM PUTS INITIAL STOP ON LONG YM SCALPERS, SELLS 144 CONTRACTS TO EXIT LONG YMH1 SCALPERS AT BREACH OF 31,385 (BREAKEVEN), GTC.

*This order was filled.*

*YMH1 -- DONE AT 31,384,20 (BREAKEVEN) -- SOLD 144 CONTRACTS YMH1 TO EXIT LONG SCALPERS, FOR ALL FUNDS, INCL TRACKER, EIGER*

robert.p.balanModeratorLeaderOwnerFeb 22, 2021 9:43 AM

*OK, new lower low for ES -- we use this to hedge the long NQs if push comes to shove.*

all PAM SELLS 288 CONTRACTS ESH1 AT BREACH OF 3860, AS HEDGE FOR LONG NQ SCALPERS, FOR ALL FUNDS, GTC -- INCL TRACKER AND EIGER

flytightFeb 22, 2021 4:10 PM

Good morning Fellow Gold Traders. Well those who thought that gold would rise above its channel line got it right. I was short, and got beat up this morning before selling GC. Rats! My rational after seeing the overnight rise in China was that NY would shoot it down, but instead they are continuing as I write this to push it up in spite of equities being all down this morning. That is unusual, but it is what it is right?

Both the yield (TNX) and the dollar (UUP) are slightly down this morning, but not by much and not enough to justify the rise this morning so to me the MOTUs are managing this rise and you need to go where they go. It is that simple. So looking at my chart this morning, we now have a long wave count to the upside. I would say working on a wave 3 right now. Anybody who is on the long side this morning care to comment as to why they were long? I obviously missed something....

TradeNvestFeb 22, 2021 4:16 PM

I thought the same thing, NY opening would take it down and with equities falling as well. So I opened up a short hedge position this morning at 1790. My plan is to open another long over 1820.

spitzbubchenFeb 22, 2021 8:18 PM

Because RB is long on 1500 contracts!

TimK123Feb 22, 2021 8:42 PM

I am not sure it's bottomed yet flytight , could be doing an ABC zig-zag to end the complex correction, my preference is for the lower diagram I have drawn here, so do think the lows might not be in yet and there might be a decent bit lower to come.

I think ES possibly hasn't bottomed yet, yields might not have topped, and the dollar might retrace its decline since the 17th. If these three things happen that should help gold to pull back further I would imagine, alongside the possible EW outlook I drew. Will have to see how it pans out (no pun intended).

Brent.ChavezFeb 22, 2021 6:57 PM

robert.p.balan do you have a target for LONG NQ SCALPERS? TYIA!

robert.p.balanModeratorLeaderOwnerFeb 22, 2021 7:13 PM

Brent, I may be able to tell you when they have bottomed out.

vjapnFeb 22, 2021 7:15 PM

Robert, If I recall correctly, you were looking for Friday/Monday for yields to top out. Are you looking to get long bonds by the end of the day?

robert.p.balanModeratorLeaderOwnerFeb 22, 2021 7:18 PM

V- first I want to see a five wave sequence to the downside -- we sell on the rebound from there. So I have just seen the fourth, We will have all the time to sell -- dangerous trying to call the top as everyone is bearish bonds. So lets give ourselves a confirm that we have seen the top.

Yellen Sets The Stage For Higher Corporate Taxes, Yield Curve Control And A Digital Dollar

In comments made on Monday morning, Treasury Secretary Janet Yellen appeared to be setting the stage for several wonderful new initiatives.

There is a chock-full of stuff here in this article to move markets -- but we wait for more outlets to chime in. Not good to rely just on ZeroHedge say-so.

ptTL9Feb 22, 2021 10:15 PM

Robert, is that the downturn you were looking for or just wave 4 in NQ? was today's close a confirmation of a beginning of a downturn?

FEBRUARY 23, 2021

GOOD MORNING EUROPE / GOOD EVENING WEST COAST

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:04 AM

NQ just lags YM and RTY due to Tesla's being hammered. Nonetheless , ES 's uptrend should start pulling up NQ soon.

The irregular wave 2 in ES also looks constructive,

flytightFeb 23, 2021 2:16 PM

Thank you Tim for your EWT lay-out and thank you freer7 for your contribution as well. I am not familiar with Mancini, but you must like him freer or you would not be posting him here. Ok, this morning looks very similar to yesterday with NQ taking another big hit overnight, now down over 500 points in just two days.

Yield appears will open flat based on TN not moving overnight and UUP is up just one cent this morning, so not much interference from these two. Tim based on his charts above is however projecting a drop today. I am long this morning, but GC is struggling to rise right now above 1810, so I am watching it carefully and may pull out real early. Please feel welcomed to contribute to the cause of being on the right side of the fence day after day! Have fun today!

RM13Feb 23, 2021 3:57 AM

The discussion about 1) TCB drawdown over period of 4 months, 2) SLR deadline of March 31st, 3) low treasury issuance of Q2, 4) yield curve steepener (including Lyn Alden's foreshadowing of yield curve control) is great.

It raises interesting questions, including possibilities that there are assets mispriced to their relative safety or risk? Does the recent turmoil in treasuries forecast possible problems for mortgage backed securities (whose puts are incredibly cheap currently)? What could go wrong with 10 trillion dollar market, with lowest mortgage rates on record, with record home prices, with lower end homeowners struggling with mortgage payments.

Hot Mortgage Market Is the Fed's House of Cards

RM13Feb 23, 2021 6:11 AM

What are the effects of these issues on DXY and therefore gold and commodities?

RM13Feb 23, 2021 5:41 PM

After 5 straight days of down on SPY/SPX, high probability of a short term rebound. These falls below gamma neutral level typically took a few days of trading to shake out, I anticipate negative trend through most of the week. I would not be short in the first days of March.

kizunoFeb 23, 2021 4:26 AM

kizunoFeb 23, 2021 4:26 AM

It's a friggin' ping pong ball, that channel! But what's that saying? As soon as you recognize a pattern, that pattern will no longer hold

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:09 AM

*NQ is testing its lows again. To make matters worse, PAM's choice of short hedge, ES, is performing better than NQ,*

*So friendly reminder -- if you are margin or emotionally constrained, take other measures like hedge with another NQ futures month, or lighten up on the long NQ trade or put a definitive stoploss.*

PAM will keep the strategy of hedging with the ES for now. Why? Tim and I believe that the NQ is not the market, and ES represents the middle ground between the value sector and high tech -- which are having a struggle for dominance at the moment. It is when ES makes a new lower low that signals to us that something in the market has changed. Nonetheless, short-term, intraday EWP analysis suggests another upswing after the low has been seen in this decline.

*Our pain-threshold is likely higher, so please adjust to your own parameters -- you are the best determinant of your own pain threshold.*

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:23 AM

But yields are sideways (range) bound, so moves in the high-tech futures (e.g. NQ) are responses to what is happening to individual high-tech stocks. Problem is, the beat down is pulling all indices lower.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:38 AM

*Tim and I also believe that YM is having its usual correction after a sharp rise, and will rally further and probably make new higher highs.*

We will go long YM when we see its trough in the current intraday retracement phase. That is regardless of whether ES will be triggered as short hedge or not. That hedge, or any hedging for that matter, is a risk management tool (buys time) while the market sorts itself out enough to provide technical clues. It does not reflect our ("PAM") market directional outlook.

The problem is that if you are margin-constrained, you may not have that wherewithal to stay hedged in some of your investments, and can still participate in some other opportunities when presented.

Obviously, the smaller the margin commitment for any single trade relative to the size of the margin capital will go a long way to having this wherewithal.

It will also allow you to manage your balance sheet line by line, and not just on aggregate.

robert.p.balanModeratorLeaderFeb 23, 2021 10:46 AM

RM13 -- You asked: "The discussion about 1) TCB drawdown over period of 4 months, 2) SLR deadline of March 31st, 3) low treasury issuance of Q2, 4) yield curve steepener (including Lyn Alden's foreshadowing of yield curve control) is great. It raises interesting questions, including possibilities that there are assets mispriced to their relative safety or risk?"

Yield Cap Control (YCC) is a non-starter this year, or even the next (2022). Let me show you why.

The example being cited for US style YCC was after World War II. The background is essential to understand why this YCC came about, After the Pearl Harbor attack and war was declared, the US committed to a 3/8% rate on T-Bills. It also put a cap on long term rates at 2.5%. There was reverberations of this floor-and-cap monetary policy, and the Fed, after a while, opted to raise the floor on bill rates.

Why?

Given the cap on yields (floor on the bond price), these long term securities were as liquid as bills. Nobody wanted to hold bills, if they can help it. Short-term paper had the added onus of very short term shelf life, aside from the low yield. In 1947, nobody held any bills, except the Fed. Raising the bill rates did not do any good, although the higher rate did not really cost the Treasury added cost -- the Fed recycled the interest payment, and paid it back to the Treasury. The Fed learned that lesson in creating money ab nihilo -- juggling the number create real money, which it remitted to the Treasury.

The predominant concern, and rationale for the YCC, was to prevent the Great Depression from having an encore, and to prevent high unemployment. But historians showed that the eventual problem was not economic depression, but raging inflation (even without the benefit of mega-scale money printing). Then of course, recession struck in November 1948, and that rendered the issue of long rate caps and short term rate floors moot -- all the rates, short and long, cratered. End of experiment.

I see similar circumstances today -- the Fed knows economic history, and will be very circumspect in doing that "experiment" again. Once bitten, twice shy. My read: with growth taking off this year, it would be foolish for the Fed to put a cap and a floor, which they said will hold forever for bills. The market will go for long term paper, and bills will become useless -- and there goes the corner-stone of the Fed's monetary policy (nobody writes about this inevitable consequence, by the way).

RM13Feb 23, 2021 2:19 PM

So is there a level at which Fed will step in to support long term treasuries? Does it have to - or will the Fed allow the system to have its fits and spits? And the implications of all of that to the dollar and commodities (dollar down, commodity prices up)?

robert.p.balanFeb 23, 2021 2:31 PM

The Dollar is not driven by rates or even rate differentials on consistent basis. It is capital flows which makes the DXY tick or untick.

If the Fed's stated objective is to let PCE inflation run above 2.00%, why put in YCC -- that is another reason why YCC is not going to happen soon. Why support the long end in the first place? They have always risen after a recession, from time immemorial. Not doing something unusual at all.

robert.p.balanFeb 23, 2021 2:38 PM

It will be by early 2022 at the earliest before the Fed gets to see 2.0% PCE -- and then they will let it run hot for a while.

That's why 2022 (at least the H1 part) will not see YCC.

Fed's monetary policy is predicated on manipulation of bank reserves, which is the way to control Fed funds. The long end has nothing to do with that policy. The theory is that changes in long term rates flows from changes in short-term interbank rates, which is manifested in the market in the form of T-Bill rates. Roughly, it takes about a month for that flow to happen -- but it is not consistent -- it can even take as long as 50-55 days. And as I said, it is not consistent. With FFR practically zero-bound, YCC is an inflation disaster waiting to happen.

Was there a link between the YCC and bill floor in the 1940s and subsequent inflation surge? Yes there was -- and it is best illustrated this way (see chart below).

The impact of long term rates on inflation growth and decline is substantial

Changes in the long bond yield leads changes in Headline CPI at least 1 quarter

RM13Feb 23, 2021 3:04 PM

Thank you Robert..

Triple.F.FredFeb 23, 2021 3:34 PM

robert.p.balan RM13 Superb thoughts guys! Thanks for the discussion this morning! Much appreciated!!:

joshweirFeb 23, 2021 7:33 PM

Agree, cheers fellas

stephane.cFeb 23, 2021 9:37 PM

Great chat

flamarkFeb 23, 2021 1:45 PM

RB Any thoughts on /RTY here.

robert.p.balanModeratorLeaderFeb 23, 2021 1:51 PM

robert.p.balanModeratorLeaderFeb 23, 2021 1:52 PM

That follows if this happens.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:48 AM

PAM SELLS 288 CONTRACTS ESH1 AT BREACH OF 3860, AS HEDGE FOR LONG NQ SCALPERS, FOR ALL FUNDS, GTC

*This order was filled.*

*ESH1 -- DONE AT 3859.50 SOLD 288 CONTRACT ESH1 AS HEDGE FOR NQ SCALPER LONGS, FOR ALL FUNDS, INCL TRACKER AND EIGER.*

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 11:01 AM

All the equity futures stuff happening, with the yield not moving at all,

stecbeckFeb 23, 2021 12:10 PM

Robert if you have time could you post an ES schema

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 12:19 PM

NQ

ES

YM

RTY

vjapnFeb 23, 2021 12:41 PM

Robert, do you have enough data for yields EWP projection?

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 1:10 PM

10YR YIELD

Consistent with the equity futures EWP schemata.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 1:54 PM

all PAM BUYS 144 CONTRACT YMH1 AT 31,435, LIMIT OR BETTER, FOR ALL FUNDS.

all PAM BUYS BACK 288 CONTRACTS OF ESH1 AT BREACH OF 3860 (BREAKEVEN) TO EXIT SHORT HEDGE FOR NQ LONGS, FOR ALL FUNDS, INCL TRACKER AND EIGER.

henry.riveraFeb 23, 2021 2:13 PM

Hello Robert, I am a bit confused, I understood since last week that we were already close to a probable top for yields and consequently the market should begin to accelerate its fall. Therefore it would not be opportune perhaps to be in cash since we are very close to the change in trend? Then start looking for shorts. Is it not very risky to continue being on the long side when in theory there are only a few days left for a probable reversal?

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 2:23 PM

The models did show that HH -- but remember, models work with WEEKLY DATA -- three days either side is possible, even likely. On th other hand the EWP constructsare done on MINUTE-BY_MINUTE analysis -- as close as you get to real time. So we are close to a top -- but I have no idea how CLOSE until the real-time analysis provides that outlook. ?Es suficiente?

henry.riveraFeb 23, 2021 2:51 PM

Thanks.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 3:30 PM

PAM BUYS 144 CONTRACT YMH1 AT 31,435, LIMIT OR BETTER, FOR ALL FUNDS.

*This order was filled.*

*YMH1 -- DONE AT 31,432 BOUGHT 144 CONTRACTS YMH1, FOR ALL FUNDS, INCL TRACKER AND EIGER. *

PAM BUYS BACK 288 CONTRACTS OF ESH1 AT BREACH OF 3860 (BREAKEVEN) TO EXIT SHORT HEDGE FOR NQ LONGS,

*Modify that to:*

all PAM BUYS BACK 288 CONTRACTS OF ESH1 AT BREACH OF 3850 (from 3860, BREAKEVEN) TO EXIT SHORT HEDGE FOR NQ LONGS.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 5:04 PM

PAM BUYS BACK 288 CONTRACTS OF ESH1 AT BREACH OF 3850 (from 3860, BREAKEVEN) TO EXIT SHORT HEDGE FOR NQ LONGS,

*This order was filled.*

*ESH1 -- DONE AT 3850.75 BOUGHT BACK 1288 CONTRACTS TO EXIT SHORT HEDGE FOR NQ SCALPER LONGS, ALL FUNDS INCL TRACKER AND EIGER. *

all PAM SELLS 288 CONTRACTS ESH1 AT DOWNWARD BREACH OF 3850, AS HEDGE FOR LONG NQ SCALPERS, FOR ALL FUNDS, GTC, PART 2 -- ALL FUNDS

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 5:22 PM

I just asked the XXX Acct Manager to allow me to use H1 NQs to short hedge our long NQ scalpers, and was approved. These trades, if filled, will not offset the NQ long scalpers. More efficient hedging this way. We will keep the potential ES short hedge as well, if filled.

all PAM SELLS 288 CONTRACTS NQH1 AT DOWNWARD BREACH OF 12,880 AS SHORT HEDGE FOR NQ LONG SCALPERS, ALL FUNDS, INCL TRACKEWR AND EIGER.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 5:42 PM

PAM SELLS 288 CONTRACTS ESH1 AT DOWNWARD BREACH OF 3850, AS HEDGE FOR LONG NQ SCALPERS, FOR ALL FUNDS, GTC, PART 2 -

*This order was filled.*

*ESH1 -- DONE AT 3849.65 SOLD 288 CONTRACTS ESH1 AS SHORT HEDGE FOR NQ SCALPER LONGS, FOR ALL FUNDS, INCL TRACKER. EIGER*

vjapnFeb 23, 2021 6:06 PM

Robert, So if NQ also gets filled, it will become an overhedge?

robert.p.balanFeb 23, 2021 6:32 PM

Yes, V.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 6:32 PM

all PAM BUYS BACK 288 CONTRACTS ESH1 TO EXIT SHORT HEDGE FOR NQ LONGS AT BREACH OF 3859, GTC -- ALL FUNDS, INCL TRACKER AND EIGER.

Still to be confirmed, but it looks like this is the fifth wave in Wave +C+ of of the NQ large irregular. --

We will confirm -- for now just watch.

xav_05Feb 23, 2021 8:17 PM

Hello Robert , would you exit the NQ hedge at 12500? Or open a NQ scalper at that level?

robert.p.balanFeb 23, 2021 8:35 PM

Nice place to trigger new NQ longs -- if we get there.

vjapnFeb 23, 2021 8:31 PM

Robert, being the ES hedge has been removed, would you raise the NQ hedge level from 12,880?

robert.p.balanFeb 23, 2021 8:39 PM

Let it move higher, and allow a little more daylight to shine through. There is nothing more infuriating than have your short hedge filled, and then market rallies hard.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 8:37 PM

PAM BUYS BACK 288 CONTRACTS ESH1 TO EXIT SHORT HEDGE FOR NQ LONGS AT BREACH OF 3859, GTC

*ESH1 -- DONE AT 3859.70 -- BOUGHT BACK 288 CONTRACTS ESH1 TO EXIT SHORT HEDGE FOR NQ LONG AT BREAKEVEN -- FOR ALL FUNDS, INCL TRACKER, EIGER*

AT 31,432 BOUGHT 144 CONTRACTS YMH1, FOR ALL FUNDS, INCL TRACKER AND EIGER.

all PAM PUTS INITIAL TRAIL STOP FOR LONG YMH1 SCALPER, SELLS 144 CONTRACTS TO EXIT YMHI LONGS AT DOWNWARD BREACH OF 31,500, ALL FUNDS INCL TRACKER, EIGER

PAM SELLS 288 CONTRACTS NQH1 AT DOWNWARD BREACH OF 12,880 AS SHORT HEDGE FOR NQ LONG SCALPERS,

*Modify this to:*

all PAM SELLS 288 CONTRACTS NQH1 AT DOWNWARD BREACH OF 13,080 (FROM 12,880) AS SHORT HEDGE FOR NQ LONG SCALPERS, GTC -- ALL FUNDS, INCL TRACKER AND EIGER

all PAM SELLS 288 CONTRACTS ESH1 AT DOWNWARD BREACH OF 3865 AS SHORT OVERHEDGE FOR NQ LONG SCALPERS, GTC -- ALL FUNDS, INCL TRACKER AND EIGER.

henry.riveraFeb 23, 2021 9:51 PM

Hi Robert, could you pls update this model. Thanks in advance.

robert.p.balanFeb 23, 2021 11:00 PM

HH -- I have posted the chart at the PAM Analytics. You may get your updates there from now on.

ptTL9Feb 23, 2021 9:52 PM

robert.p.balan thank you, what is the plan now, up or down?

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 9:58 PM

I have been long YM since early NY trade. I have been removing and reinstating short hedges (several times), and walking them higher. That is pointing to an outlook of higher market valuations.

QuaziFeb 23, 2021 9:58 PM

And an important and timely question I might add.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 9:58 PM

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 9:59 PM

This is what was posted in early Europe showing upside bias.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:00 PM

Did you go long YM Mr. Q?

QuaziFeb 23, 2021 11:31 PM

Yes I did in an ETF late in the day robert.p.balan ... thanx for asking. Looks like should I exit?

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 10:15 PM

PAM PUTS INITIAL TRAIL STOP FOR LONG YMH1 SCALPER, SELLS 144 CONTRACTS TO EXIT YMHI LONGS AT DOWNWARD BREACH OF 31,500,*This order was filled.*

*YMH1 -- DONE AT 31,499.70 -- SOLD TO EXIT 144 YMHI LONG SCALPERS, BOUGHT AT 31,432, FOR ALL FUNDS, INCL TRACKER AND EIGER.*

Considering that YM has been to as low as 31,116, this is a very satisfying win even if the gains are small.

robert.p.balanModeratorLeaderOwnerFeb 23, 2021 11:02 PM

Ok gals/guys. I see you in Asian trade Wednesday, Feb 24. GN everyone

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This is the latest performance of PAM's One-Contract Portfolio, with a margin capital of $100,000, making the same trades as the flagship Swing Fund, but doing consistent, one contract-trades.

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 Here is the current status of the PAM flagship Swing Fund, which includes open and closed trades.

During the twelve months of 2020, PAM delivered phenomenal real-dollar Hedge Fund trading performance, the best at Seeking Alpha:

PAM's flagship Swing Portfolio, year-to-date (December 31, 2020) delivered $100, 181,522.77 net profit on $11,172,813 margin capital.

Year-to-date performance: 860.27%, on 888-98 win-loss trades.

January 2021 spreadsheet here:

Year to date 2020 spreadsheet here.

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