The overnight comments made by Draghi (combined with the expected US policy
gridlock from Team "O") have spooked the risk markets, and this morning there is a
significant flight to safety bid in US treasuries.
Clearly, most traders who held a short outright UST position overnight have stopped themselves out by now (UST market trading volumes are HUGE overnight and this morning).
Nov. 7th 2012 7:12 AM
(Bloomberg) -- Cash trading at 285% of 10-day moving average vs 217% TY, CRT strategists David Ader and Ian Lyngen write in note.
This in itself (short covering) argues for a shot at setting a short 10yr trade. However, the risk situation today
is highly volatile. Any short UST position should also have a small short risk position to hedge against a dramatic drop in risk as stop levels have been breached (such as ES).
The question now is...do you set a short before the 10yr auction...or will the fight to safety bid dominate the auction and create a "Kobayashi Maru" scenario for the dealers? The 24bln 10yr auction itself should be able to satisfy any short term need for UST duration, so a post auction (later this afternoon) rally would only be short covering from those who try to go into the auction with a short position and miss the auction. If that occurs, then I like selling the corresponding pop in whichever UST security shows the most short covering (short covering is always a fade). I'm sure that with the UST market pausing here over the last 2 hours (10yr @ 99-28 as stocks just dropped another 15 ES points as i am writing), a handful of traders have taken a shot at setting a short. The 40 point move in ES today is probably enough for the day (rare is the ES move greater than 40 points).
With the 11am 30yr buyback out of the way a moment ago, i like setting a small 30yr short here @ 98-18 with a pretty tight stop combined with a small short in ES @ 1394.
Trade update from Twitter:
No likey this price action as we approach 1pm...exiting my short 30yr short ES position (98-14 and 1393).
— govttrader (@govttrader) November 7, 2012
Stepping back from the auction....
Returning to our Elliot Wave guesstimate for broad market direction that we discussed 3 weeks ago...the outlook for stocks doesn't look good. In Elliot speak...stocks have been filling out an expanding wedge pattern following the completion of a 5 wave cycle. The next impulse wave should be very large. While its hard to say when that will happen, the bias is clearly to the downside for stocks (in both the US and globally) over the next few months (excluding some kind of divine intervention).
The only trade that made sense (screamed out really) to take home last night was the 10/30 steepener...as that bizarre 10/30 flattener that was put on yesterday afternoon dislocated 10/30 from reality (from 119 --> 117 ) (see my twitter comment on that one).
That was short lived as 10/30 quickly returned to 119 overnight and has stayed there (quick low-risk 4% return thank you very much...960% annualized...but nobody does that right??). The 10/30 flattener trade makes sense coming out of the 30yr auction...but not before. I still can't get my head around the trader who put on that flattener. Regardless of who won the election, everybody knows the flattener is a trade you put on COMING OUT of the 30yr auction...NOT BEFORE.
I'll post again as we get closer to the 1pm auction....
more later on the blog and twitter...govttrader out...