Today's Trading Strategy: Short Junk Bonds and Stocks
Yesterday, even down 14 points on the SPX, the market felt complacent and long. It seemed like investors somehow just "knew" that something had to spike the rally - U.S. government, or the Fed, or EU, or 200 DMA bounce. In the end, it finally gave up.
I covered some (SPY) short into the close and am covering a bit more this morning as Europe has stabilized. European credit markets have responded to more political noise by improving slightly. A round of minor officials talking up the rescue package (that was announced two weeks ago) was to be expected as the market had given up almost all of its gains.
We went down so much in the past week, I expect a small bounce in equities. Some of the data is bound to be good. I will be looking to reset shorts into the bounce, but will be paying very close attention to European sovereign credits. Renewed weakness there, or in financials will hasten my decision to reset shorts. The CMBS market also is worth watching. CMBX was down hard yesterday, and there was a Bloomberg story that said, "Commercial-Mortgage Bond Late Payments Jump to Record."
I remain short (HYG), (JNK) by being long (SJB). Junk bonds had a rough day yesterday, but did not capitulate. The NAV of these funds seems more reflective of the offer side of the bond market than the bid side. We just didn't see people indiscriminately selling bonds into bids at the close yesterday. Lots of investors were checking for old bids, but there wasn't the outright capitulation. I believe if we get another 1-2% move down in stocks, junk bonds will follow in lock step as investors will hit down bids. If stocks move up 1-2%, junk bond ETFs will barely move higher as all it will do is let bids firm up and NAV to correct to a more normal "mid-market" valuation.
So I remain small short stocks, am covering more, but will not get long unless I see real progress in European credit. I will reset shorts into any rally, but with a bias to short more junk bonds than stocks. I will be watching the data as well, though think there is a chance we will get some upside at 8:15 (ADP) followed by some more disappointment at 10:00 (ISM and Factory Orders).
