Vikram Saxena's  Instablog

Vikram Saxena
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Vikram is an electrical engineer by training and has held a variety of roles spanning multiple industries. He started his career in the semiconductor industry in the Silicon Valley, before moving to a proprietary trading desk at a bulge bracket investment bank in New York. Vikram has also... More
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  • Thursday Roundup: Bond Market Leads Equities 0 comments
    May 28, 2009 9:44 PM | about stocks: TLT, TBT, IEF, USO, OIH, SPY

    The financial markets had a relatively sedate day with the action in the bond markets driving equities. The 7yr Treasury auction was met with reasonable demand which had a calming effect on the bond market which finally got a bid. This helped the equity markets finish positive for the day. The energy sector out performed today with a greater than expected draw-down in oil inventories sparking another rally in oil and oil related equities.

    Treasury Market Recovers

    The treasury markets were volatile today, selling off before the auction and then recovering after the auction to finish strong. One metric I follow at the long end is the difference between the 30yr and the 10yr yields. This spread narrowed today, closing below its 50 Day SMA for the first time since early January. The yield on the 30 year has a strong postive correlation with this spread. I presume the 4.5%+ yield on the 30yr bond is attracting buying interest, now that the technical factors associated with the spike in yields have abated.

    Often the most complex market behavior has very simple explanations. The recovery in Treasuries after the bond auction, could simply be attributed to the fact that the Treasury is done selling for this month; and the next auction is going to be in the second week of June, almost a life-time in the current markets. With the overhang of new supply not present, bonds were bid today.

    Economic News: Continues to Point to Improvement

    The equity markets have some good economic news to cheer. There are clear signs now that the economy is gradually bottoming out. The new Jobless Claim number came better than expected, while continuing claims continue to go higher. The Jobless Claim number seems to have topped out in the mid-600K and seems to be declining gradually. This job-loss number is a co-incident indicator; it hits its top when the economy hits bottom.

    On the other hand the news from the housing market continues to be dismal, with almost 12% of all home mortgages delinquent. Durable Goods orders came in higher than expected in April but were revised downwards for March.

    The GDP number tomorrow is going to be important in setting a tone for the market. There are some expectations that last quarter numbers may be revised up.

    My Portfolio

    I continued to day-trade today, using the action in the bond market to guide my equity futures trades. The TLT acted as a leading indicator for the price-action in equities for most of the day. I added to my TLT position in the pre-auction sell-off. The treasuries are getting a bid and I expect a 3% return over the next few days.

    I was a bit pre-mature in establishing my bearish put spread on the USO; it has rallied about 2% from my entry point. However, I am not particularly concerned since this is a spread which expires July. It is quite reasonable to expect a pull-back to the $60 level in the front month crude contract over the next two months. There is a huge overhang of excess supply parked in tankers anchored off-shore which the market is ignoring. Like last summer, the price of oil is being driven up by the falling dollar trade, where investors seek haven in commodities. However, the economic environment we are in is dramatically different from last year, and I believe that the speculative excess in the oil markets is not sustainable.

    Market Outlook: 200 Day SMA Looms

    The S&P500 is now within 24 points of its 200 Day SMA. I expect the market to test that level soon. After a rally of such a magnitude, it would be highly unlikely for the market to come so close to the 200Day SMA but not touch it. Perhaps a bullish GDP report tomorrow will provide the ammunition for the market to make that charge.

    Stocks: TLT, TBT, IEF, USO, OIH, SPY
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