I'll be fairly quick today. What a surprisingly boring Friday considering it was an options expiration day. Stocks closed pretty much flat as a board as the market continues to calm down and gain a false sense of security. The VIX was down again today at under 34.
PUTS are starting to get cheap again as a result. I picked up a few June QQQQ's the other day for .67 a piece. I took a very small position here as I continue to very slowly scale in short here.
I think the risk is to the downside moving forward(what a shocker right?). We are pretty severely oversold here. IMO the next several weeks will be all about the bond market.
Take a look at the 10 Year today and this week:
The bond market appears as if it wants to force the Fed's hand here. If you recall, Ben's quantitative easing policy started with the 10 year yielding 3%. Yields immediately dropped to 2.5% on the Fed's announcement..
As you can see above, yields rose sharply today to close at 2.93%. We have taken a few runs at the 3% level in the last few weeks. I think that the traders in Chicago are about to take a more serious run at 3% in order to see how the Fed reacts. Traders have been trying to figure out exactly how aggressive the Fed will get with their QE when yields rise.
The only way to find out is to take them higher and force Ben to make a move. You see the bond guys know the Fed cannot afford higher lending rates because it will blow up whats left of the housing market.
What they don't know is how far the Fed will go in terms of buying treasuries. Making things even more interesting here is the staggering amount of treasuries that need to be sold in 2009. We are expected to issue around$2.5 trillion dollars in treasuries this year to finance our Ponzi government spending versus the $750 billion or so we issued last year. This is turning into quite a game of cat and mouse we have going here between the bond market and the Fed.
The bond boys are really smart guys and I expect them to eventually take a serious run at the Fed. Markets hate uncertainty and the Fed has created plenty of this since it announced its QE policy.
How far will the Fed go in order to keep lending rates low? Who knows? The Fed has to be extremely nervous given the enormous amount of treasuries that need to be sold this year. There is a limit to the Fed's resources despite their claims, and the bond traders realize this especially given the massive supply.
If demand around the world for our worthless debt crashes will the Fed give up if they are the only buyer left bidding on bonds? If theFed decides to walk away from treasuries at a certain point lending rates are going to skyrocket. This will destroy whast left of both the housing and equity market.
Keep an eye on this story.
If bond yields on the 10 year begin to creep up over 3% find a place to hide!