Another melt up low volume day. Below are some short term charts. Note how the SPX actually traded higher a few sessions ago. Watch the Viox index carefully here. We might get the total inverted panic if we attack those SPX highs.
Also note the Golden Cross eveyrbody is talking about. The market is hitting long term resistance charts and there is a fairly big wedge in the SPX. All in all, we would expect the market to break away rather brutally soon. Just pick the direction via cheap gamma.
As the markets are cheering “great” PMI figures, Europe remains under the same debt problems. We have learnt of the EFSF, the LTRO and other fancy words over the past year. We have also learnt, once again, don’t fight the Fed, as their stealth book is rather big.
The markets have continued the climbing of the wall of worry, but just as last year, we are getting that Teflon market deja vú again. Bears have shorted a dull, boring , no volume market. As the Golden Cross (according to many 100% sure signal) is “happening”, the shorts are feeling the pain, and have to cover positions in a light volume market.
The Vix has come off quite a bit over the past months, but is still trading rich compared to the realised vol. Term structure is at extreme levels, and at 20 year highs. This implies investors are still pricing a big risk in future, as longer term variance swaps trade at big premium to short term swaps. People have been panicking about having theta in the book, as the “market is not moving”. We are probably reaching the point where the last inverted panic is about to happen, ie people will sell short term vol in order for the implieds to “catch” up with realized vols. We are slowly approaching the time to be selling some long term vol vs buying short term vol. Why, well, things could start to rock sooner than later. Remember, Europe is still looking for China to save IT. From Spiegel;
Many in Europe have been eyeing Beijing’s trillions as a possible solution to the continent’s debt crisis. During her trip to China, German Chancellor Angela Merkel plans to promote investments in the debt-ridden euro-zone countries. But the Chinese have so far been tight with their money. Will Merkel succeed in getting Beijing to bend?
Bondholders negotiating a debt swap with Greece may get a sweetener tied to a revival in economic growth that would ease the impact of accepting a lower interest rate on the new bonds, Bloomberg says, http://ftalphaville.ft.com/thecut/2012/02/01/861911/growth-linked-sweetener-for-greek-bondholders/
Paul Volcker has defended proposed trading rules for US banks that are being criticised by foreign governments as likely to disrupt the operation of their national bond markets. Japanese, UK and Canadian regulators, http://ftalphaville.ft.com/thecut/2012/02/01/861901/volcker-says-bond-markets-are-not-at-risk/
The Chinese manufacturing sector has made a surprisingly strong start to the year, the FT says, with domestic orders cushioning the impact of Europe’s debt woes, according to an official survey. The purchasing managers’ index, http://ftalphaville.ft.com/thecut/2012/02/01/861981/chinas-official-pmis-gain-ground-in-january/