When bullish news failed
October 30, 2020
–I’m not exactly sure where I heard this trading rule, I think it’s from Richard Dennis, but I have never forgotten it: “When bullish news comes out and the market doesn’t go up, it’s bearish.” Yesterday’s tech earnings all looked pretty good. Large revenue increases, earnings beats. But Nasdaq futures almost immediately broke and haven’t recovered, at time of this writing NQZ0 is 11120, down 222.75. The dark cloud was slowing i-phone sales.
–Yesterday mostly consisted of a torrid rally in stocks in front of earnings, which translated into further declines in bonds. Ten year yield rose 5.2 to 83.3, and bonds +4.8 to 1.612%. Vol was higher across the board, but most notably in US (bond) contract, with a new recent high in Jan vol at 11.4. The atm 174^ settled 6’12, having been 5’32 on Tuesday.
–Curve was steeper, as near contracts are pegged by the Fed. 2/10 closed 68.2, up 5 bps on the day and testing the recent high just above 69.
–There continues to be decent size buying in Blue March midcurves: +20k 3EH 9937/9925p spd for 4.0, settled there ref 9944, and a buyer of 9937/9900p 2×3 for 15.5, settled 14.75. The 9937p added 27k new open int, now up to 135k.
–Attached is a chart of FV vs US 1-month vol. The long end has become suspect due to its failure to rally on stock breaks. I think the relative outperformance of bond vol underscores this concern. As many have already noted, bonds might not do anything to cushion bone-rattling equity losses. But gold isn’t helping either…languishing around 1875.
–For your Halloween viewing pleasure, here’s a short from Disney in 1929. (The “crash” was Oct, 29, 1929). Scary!
https://www.history.com/this-day-in-history/stock-market-crashes
Image below shows 3m FV vs US vol. The lower panel shows the spread is near recent high.
