"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, October 16, 2014

This is not your Daddy's Bond Market

Having been trading the bonds for many years, the recent volatility has really caught my eye. The extent of the price swings in this market has been nothing short of breathtaking.

Whenever you see a market make swings of this magnitude, know that someone is in serious trouble.

Take a look at this short term price chart and imagine the carnage being inflicted on some traders as they swing back and forth from such huge extremes.

Do you see those big volume spikes? Someone got obliterated!

Try to imagine that you are a risk manager for a large banking or mortgage interest and are attempting to institute some sort of hedges! How in the world do you even read a market that is doing this sort of thing? I can tell you that hedgers and speculators both have been run over in this market the last couple of days.

This is what I am referring to when I caution traders out there. These markets can clean you out faster than a package of Ex-Lax if you let down your guard. Either trade smaller or stay on the sidelines but do not try to play the hero right now. It is just too dangerous!

Making predictions, postulating this or prophesying that, in dogmatic terms is very foolish and speaks more to hubris than it does to sound judgment. What I do know is that the entirety of the markets is very unsettled right now with the VIX having rising sharply and with the currency markets having been thrown into turmoil. Until the currency markets calm down, be careful.

By the way, crude oil is managing to hold above $80 for now and the XLE is up today. Maybe crude has gone down enough? I don't know but am monitoring it very closely.


  1. absolutely Dan!

    the bond market might be 10 times bigger than the stock market, it's buh buh buh big.. and yeah it's supposed to be about safety.

    VIX hanging around 26 makes everything volatile and must be alot of margin calls, fund liquidation.

    yest blurb: Nomura is closing today several of its long USD trades, to protect profits, noticing that the that volatility we are seeing today is different than the type they had assumed.

    “At this point, regardless of the very long-term outlook for the dollar, we are very reluctant to extrapolate further USD gains linearly into Q4,” Nomura argues.

    “Moreover, the recent trend of pronounced risk reduction creates an increased probability of position unwinding in dollar space. This is an additional tactical headwind as dollar longs reached all-time highs on some metrics last week,” Nomura adds.

    Among the trades Nomura closing today is a long-standing ‘dollar acceleration basket’, which was initiated on 30 July 2014. The basket comprised USD longs vs AUD, CAD, CHF, EUR, JPY and CLP. This trade is up 4.1% since initiation.


    1. Are you not tired of jumping into other house ? I see you got talent and I suppose that you can make your own blog right now

  2. Crude experiencing volatility of its own. Up $5 early this am from just below $80, now back down $2 from that high in the Nov contract. Almost untradeable conditions in many markets currently.

  3. Thanks Dan.
    As much as I like the overall volatilty I also like the feeling of safety as I sit on the sidelines and watch how it plays out.

    Good luck and congrats to anyone out there trading these markets and making a profit.

  4. Hi Dan, thanks for the great work. I have always wondered how the Fed's QE props up the stock market. After all, the Fed buys bonds and mortgages, not stocks. So exactly how does the stock market go up!

    I recently came across an explanation that made sense. The Fed buys bonds and mortgages causing yields to drop. People who normally buy bonds then switch to corporate bonds (since these bonds have higher yields) which causes corporations to be flush with cash. The corporations use this cash to buy their own stock and THAT is what results in rising stock market.

    However, being a novice I do not understand how this process works in reverse. The Fed is scheduled to stop all QE in October and may be a reason why stock market is falling. But how does this work? Also bonds still keep going up. Who is buying them and why (since yields keep falling)?

    Also, does not the daily chart of TLT look as if it might have topped for the intermediate term?

    I know these are lots of questions, but then I am still a novice. Any explanation and an idea of possible scenarios will be helpful. Thanks.

    1. May I jump in ? People who got a lot of USD have only 2 choices right now: bond and real estate

    2. Markets correct because of flows, because what goes up must sometimes go down.
      SP500 is correcting maybe because once everybody bought, everybody is long the market...and can only sell, there are no buyers anymore.
      Very simplistic statement, but just to remind why a market suddenly collapses at the most unexpected time for the majority of people, caught on the wrong side.

      Also, there is sthg that markets hate even more than bad news.
      It's uncertainty.
      Ebola is a huge uncertainty because we can't determine the outcome. People are afraid of a risk they are unable to evaluate.

      There are probably many other reasons, but I simply post here to say : don't underestimate the news of the Ebola spreading in Europe and US, and don't underestimate the possibility of a market breaking down under its own weigh, like a lightning in a blue sky.
      T.A warned us about it all.
      First, SP500 was unable to break through its upwards resistance. Then it started to break through its upwards support (1945). All this was a sign that the current upwards pace was unsustainable.
      Not to worry : even if we correct down to 1700+, SP is still in a long term more sustainable upwards trend.

    3. Thanks Linh and HDH for your responses.

  5. Do yourself a favor. DON'T TRY TO FIGURE THIS CRAP OUT!! Go with the flow and tread lightly. Good luck! :<)

  6. Thank Dan for warning. However this is the best environment for day trading. Catching the move of 20-40 points of SP500 not quite hard. Just stick to the system. And I looking for long bottom SP as well. Appreciated any your input

  7. Chart shows actual position of the market, as it signifies both growth and decline, it's all depend on observation as analyst of Epic research do.


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