From Peter Tchir of TF Market Advisors
Time To Cover Some Shorts?
Yesterday morning, the market still felt extremely complacent. Stocks were down 15 points, and yet it seemed like most people were waiting for the "inevitable" bounce. Whether it was going to be something out of the US government, or the EU, or support from the 200 DMA, everyone still seemed more afraid of a bounce than of continued sell-off. By the end of the day, some of that complacency was finally taken out of the market. It still feels that the market is a bit too long and hasn't fully digested the downturn in the data, so I remain biased to the short side, but did cut some yesterday into the close and have been covering more this morning as European credit has (briefly) stabilized.
I will continue to watch European credit closely. It seems like the politicians are starting to talk up the last bailout plan and how they could increase it. This is about par for the course, since 2 weeks after the latest deal was announced, most of the market gains, and almost all of the good feelings inspired by it, have been given back. It would take a material change in Europe for me to switch out of my negative bias.
We are probably due for some positive surprises from the data, and although I don't think the weakness is fully reflected in the market, we could bounce a little more.
If either Europe or the data really disappoint, I will rush to reload my shorts, otherwise I will likely gradually reset shorts into any rally. I am shifting my focus to short more HY than stocks. It seems like high yield is still priced to the offer side and did not fully capitulate into bid hitting mode. I beleive that a 1-2% down move in stocks would create a similar move in junk as investors would hit fading bids. On the other hand, the fear was so palpable at the end of the day, that if stocks go up 1-2%, junk may only move a 1/2% as the main move will be bids firming up to where people have bonds marked, rather than a real liftathon.