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Still Rising Fed Balance Sheet Supports A Rally In Yields And In Equities For A Few Days Longer

Mar. 03, 2021 9:30 AM ET6 Comments
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Asset class modeling, Macro analyst, Bonds & Equities, Currencies & Commodities

Seeking Alpha Analyst Since 2011

Robert P. Balan runs Predictive Analytic Models, #1-rated trading unit at Seeking Alpha. PAM trades Swiss HF funds using Federal Reserve, US Treasury, and term (money) market liquidity data flows as basis for trading decisions. He is domiciled in Zurich, Switzerland.

Robert Balan has 5 decades of experience in the financial markets. Education in Mining Engineering, Computer Science & Engineering, M.S in Quantitative Finance, and training in Economics led to a commodity analysis career during the commodity boom of the early 1970s. Robert made a switch to global macro focus in the early 1980 when the commodity bull market waned, with specialization in foreign exchange. Robert wrote a very high profile daily FX analysis while Geneva-based (Lloyds Bank Int'l) in the mid-1980s (the first FX commentary with a real global readership, "most accessed" in the Reuters and Telerate networks from 1988 to 1994).

He worked for Swiss Bank Corp and Union Bank of Switzerland (precursors of today's new UBS) as head of technical research in various finance centers (London, New York, and subsequently, head of prop trading at SBC in Toronto ) from the late 1980s to mid-1990s. A stint at Bank of America as head of global technical research followed in late 1990s to the early 2000s. 

Robert returned to Switzerland in 2004 as head of technical research and strategy, and FX market analyst for Swiss Life Asset Management in Zurich. Robert wrote FX analysis and capital markets commentary for Saxo Bank (Denmark) in the early 2000s. He joined Diapason Commodities Management (CH) in Lausanne in 2008 as senior market strategist, and subsequently Chief Market Strategist, utilizing fundamental macroeconomic drivers and structural/technical data in modeling asset price and sector movements. 

Robert wrote a book on the Elliott Wave Principle in 1988, which has been hailed by the London Society of Technical Analysts as best ever book written on the subject. Robert is a member of the National Association for Business Economics (NABE), U.S.A. 

There is evidence that the still rising Fed's Balance Sheet will continue to support BOTH a rise in equities and yields for a few days longer.

Since Asian trading today, Wednesday, March 3, 2020, equities have been rising along with yields. That's just an 8 hour period, so it is not very definitive. But we have to start looking at the possibility that the positive covariance between equities and yields returns soon. But what may realistically happen, is that when yields are not rising (or are falling) equities will rally higher; and vice versa. But the general trend for both equities and yields could be higher for a week longer.

The historical seasonality for Fed's Balance Sheet outflows kicks in a few days from now (see chart below). The model for the current, 2020-2021 SOMA Transactions (thick blue line in charts below) as well as historical seasonality, have already rolled over, and will be a negative factor for both equities and yields until third week of March. Yields should we lower, and equities could be lower as well during this period.

Decomposition of Liquidity Flows (Fed's Balance Sheet) and 2020-2021 SPX (Jan 1, 2020 to Apr 30, 2021)

Watch the behavior of the SPX Decomposition Profile -- which provides the linkage to the liquidity flows

No alt text provided for this image

In addition to these factors, our current 2020-2021 Fed Balance Sheet model, which is ahead of the actual data for a week, is already showing a peak, in line with its historical seasonality (thick blue line in the charts above and below).

Decomposition of Liquidity Flows (Fed's Balance Sheet) and 2020-2021 10Yr Yield (Jan 1, 2021 to Apr 30, 2021)

Watch the behavior of the Yield's Decomposition Profile -- which provides the linkage to the liquidity flows

No alt text provided for this image

Key take-aways:

(1) Both yields and equities could rise TOGETHER for a few days prior to the start of the seasonal outflows in the Fed's Balance Sheet; and

(2) From that peak in yields, and equities, both could fall or go sideways until the third week of March (at least).


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.


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.


Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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