Anatomy Of A Squeeze

Tyler Durden's picture

While little has really been said or done this week with regard to solving any of the structural issues facing Europe, macro data globally has hardly been encouraging, and micro (earnings) have not aggressively beaten earnings, the equity and credit markets have ripped higher. While many have talked of short squeezes, which obviously are at the heart of every trend turn (whether micro or macro), we thought it useful to get some context on this move to judge when/if it will ever stop.

The move started last Friday but really ramped up starting late Wednesday when we saw equities tear away from any other asset class. This was quickly seen through but then as we got no cataclysmic news, we drifted higher once again and Thursday saw a similar picture where equities were aggressively bid - much more so than HY and IG.

Chart: Bloomberg


What is notable is that HY was in fact dramatically more cheap than equities still and would have been the long of choice for any sophisticated trader looking to add beta exposure to his book - given the relative cheapness. This also eschews the asset allocation rotation argument as HY should have led as it had become so cheap - this feels like an equity index-driven chase as opposed to risk appetite-driven (and volume helps to confirm that). Sure enough equities screamed higher outperforming HY which in turn outperformed IG (these are risk premia NOT yields). Today saw a similar story once again - equities over HY over IG.


But there are a few things that make us wonder if this short squeeze is running its course.  

First, empirically we have seldom seen the kind of price action in this chart occur for more than four days in a row - this is anecdotal but until we see HY really start to participate and catch up to equity's exuberance - we remain of the opinion that this is squeeze-driven.  

Second, credit indices have compressed to their single-name-based fair-value and the difference between the index and its fair-value has compressed massively this week. It would seem that all the macro hedge overlays have been removed leaving the market long and prone to correction on any disappointment: e.g. HY -85bps since Friday vs -32bps for the HY fair-value, IG -9.5bps vs -5bps for the IG fair-value this week.  

Third, since Friday, equities have outperformed HY and IG by around 7-8bps equivalent - a shift that is relatively unusual and prone to rapid reversion.

Fourth, concessions on new issues remains high - hardly a signal that risk appetite is really back (e.g. TXT 5Y came 50bps or $2 cheap to market-implied expectations this week).  

Fifth, implied correlation remains high in the equity options market even as VIX drops into OPEX - this tends to mean professionals remain more worried from a systemic perspective than the headline VIX moves would suggest.  

Sixth, distributional analysis of the SPY options market shows that skewness and kurtosis remain implied at levels indicative of concern at large tail risk to the downside - even as short-term these have reduced - these are levels that are very hard for a retail trader to actively position to benefit from - even as skews have flattened with levels.  

Seventh, a longer-term CONTEXT (risk-basket-based analysis of where ES should trade) shows three areas of equity squeeze in the last week and also indicates that equities remain notably expensive relative to risk assets in the short-term (this is as opposed to the more typical daily re-calibrated CONTEXT model).

Chart: Bloomberg


Of course, who knows when this will end (if it will end) but we are confident that Birinyi's ruler will have to bend to the will of a macro and systemic environment that simply does not look good and is marginally priced into credit and equity markets.

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Cognitive Dissonance's picture

How exactly are they going to put the toothpaste back in the tube?

Cdad's picture

This is not a market.

Cognitive Dissonance's picture

But you are definitely Cdad.

Too funny and spot on your consistent message. :)

flacon's picture

Turn your GOLD into Aqua Regia (Royal Water). INVISIBLE to metal detectors!

Zero Govt's picture

...strictly speaking it's not a tube, it has a tapered edge one end 

nantucket's picture

they do it at the factory, don't they?

Cognitive Dissonance's picture

We aren't talking OEM here, but rather reconditioning and reconstruction. As in putting it back into the tube after Baby Ben squirted it all over the place.

Robslob's picture

Fuck this complicated shit.


Gold is on sale now...put that in your "risk" pipe and smoke it.

snowball777's picture

Don't you mean smelt (as in "he who...")?

Id fight Gandhi's picture

This is how smart people say WTF

unununium's picture

Equities are being juiced with the QE Lite funds, at a minimum.  $3.2B yesterday.

traditionalfunds's picture

I remember reading open interest was largest @ SPY 120. Overshot b/c squeeze and Central Bank kumbaya.

achmachat's picture

1. study ZeroHedge

2. ?

3. Profit!

snowball777's picture

2. Puts on ES / Risk divergence trade

dwdollar's picture

How about the anatomy of a clueless bipolar schizoid squeeze?

Denver768's picture

As the behavior gets older, the cracks get wider and that's exactly when you need to be on your toes.

ceilidh_trail's picture

Glad I covered shorts last week. Wish I where brave/smart enough to have gone long then. Oh well, nothing to do but hang on ZH...

Miss Expectations's picture

CONGRATULATIONS ZERO HEDGE...You've been linked on DRUDGE...Right Column...Goldman Sachs Exclusive Financial Advisor


caerus's picture

also in right column...barry manilow thinks ron paul is "solid"

LongOfTooth's picture

Does this mean Ron has the gay vote?  


Libertarian777's picture

that's if you believe that 'gay people' have rights.

If you understood libertarianism and Ron Paul you'd understand what he means when he says there are no 'gay' rights, there are no 'black' rights (for that matter no 'white' rights either).

There are individual rights, and all individuals are equal (no one's right can override another's right).

If gay people choose to associate with each other, that is their INDIVIDUAL right to.

Having 'gay' rights or 'black' rights is akin to having 'bankers' rights, 'farmers' rights.

e.g. gay marriage.

There is no 'right' to a gay marriage. There is a right of the individual to associate themselves as a married couple. Whether those individuals are of the same sex or not is irrelevant. The individual has the right.

The irony is that you end up having these 'gay' rights because current laws prevent INDIVIDUALs from freely associating in the first instance (in gay marriage).

Homo Erectus's picture

SEVEN, usual fraudulent activity in the days and, particularly, hour ahead of the equity futures & options quarterly expiry - at the open.

caerus's picture

i wonder if it can predict its own unplugging...hmm...

1000yrdstare's picture

Of course, I did'nt need a computer to tell me of a major crisis ahead....


r101958's picture

When is anybody here going to address the huge break (now $28) between Brent and WTI/Nymex? This divergence is one of the biggest stories in the making. The US gov and TPTB are attempting to put a concrete $90 per brl ceiling on WTI/Nymex. Why? Is it perhaps that the crude going through WTI/Nymex is mostly used for making fuel for vehicles while Brent is used for other items for which the rise in price can be better hidden? If people look at the patterns over the last few years then they will see that it is very easy to discover where the divergence started. It began when QE2 started. It is quite clear that there is a great deal of manipulation going on here in an effort to hide the real issues facing us. If this is not the case, then I would like to know why there was no divergence in prices (or very, very little if any)before August of 2010? We can rationalize all we want about the bottleneck in WTI but that doesn't explain why it wasn't happening before one year ago. Just look at the price action yesterday. Brent was up over 2% to around $116 while WTI/Nymex was down. Why? WTI/Nymex broke $90 for a little while and then retracted. You watch, whenever it gets close to $90 there is suddenly a break lower...all this while Brent stays above $110. $90 resistance? arse.

HD's picture

Forget 2008. It's 2007 all over again.

TyCarrerra's picture

Oh, hell. I went ahead and bought some stocks yesterday, and my cash is now way low. I have been holding cash for when the S&P goes to 900 or lower, but I am not sure TPTB will allow it to go there.

I got PM's for when things finally collapse. But the people that control everything will keep this ponzi going, no matter how many Greeks, Germans, Americans protest. Unless people start shooting, things will go on as it's been going on. Americans may have the guns to do it, but will they ever get off their fat asses? Europeans? LOL! They've been brainwashed for so long, I don't even know if they know which end of a gun you point to an enemy.

So, there's really no point fighting them.

Wish me luck. I wish everyone here good fortune.

PS - Knowing my luck, the market will finally collapse in two weeks...

schadenfreude's picture

You won't change the system with your gun.

adr's picture

Hey the markets went negative for a few minutes but Europe is closing. For the past four days that has meant a 1.5% slow ramp up to the close. Where we end up nobody knows.

My analogy of the current situation is:

I had $10 but the market took away $9 and left me with a dollar. Then I found $1 on the street. Some guy runs a story telling everyone my net worth increased 100% and the headlines  scream out how great my situation is. I sit there saying, hey morons I'm still down $8.

Looks like the 5 point up two point down algo ramp has started. Looks like another 25 point up day on the S&P unless nobody wants to hold anything over the weekend and we get a massive 3:45 selloff.

Nice sine wave in the futures right now. Sure the markets aren't 99% controlled by computer programs, sure. I wonder if the fractal algo will take over crude again and shoot it up above $90?

r101958's picture

Good points adr. I might add that the Dow's performance over the last 5 years is -1%. Some might say 'That's not too bad, is it?'. It is when you consider that the dollar has lost about 20% of its value over the same period. This means if you had put 10k in the dow 5 years ago, and sell now, your investment in real terms is now actually worth a little less than 8k. Can we still say 'That is not too bad'?

rocker's picture

This pretty good stuff.  Somebody did some great work.

Thank You Zero Hedge for what you do.

I have maintained a view that eventually they need to sell off the excess suppy of equities that many fund and hedge fund managers are holding.  While they are trying to convince us all there are buyers. I think more and more people see what is going on in Europe and see Lehman all over it. Just like Lehman, first the banks told us they do not need money. Then we find out the FED gave somebody enough cash to keep the doors open.  Can somebody say deja vu.

The quesrtion is when will they decide to dump this market of equities they are holding.

I will be a buyer after the fact.  Not a penny before.  The risk taken to buy is not providing enought reward.  

ZeroPower's picture

Re the VIX - its OpEx is on wednesday (more specifically, tuesday is the lasting trading day) so we might see some volatility due to the tail wagging the dog in this case (VIX vs S&P cash)

Also, today the VIX finally went back into contango. It was in backwardation since end of July which boded very well for its derivatives (VXX, etc) but we saw huge put buyers on thursday of actual VIX front month futures.

Now...this doesnt mean it;ll last, as the contango is quite negligable among the first few futures, but it still shows the market believes we might gotten ahead of ourselves with the IV levels.

For those holding any positive VIX stock, you are likely to lose out more now and the short term inverse ETFs (XIV...) are likely to gain now from the negative roll yield.

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