Is The "Risk-on" / "Risk-off" Trade Starting To Fall Apart?

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

Is The "Risk-on" / "Risk-off" Trade Starting To Fall Apart?

For awhile now, the market has loved to talk about risk-on or risk-off.  Occasionally a few outliers exist, but by and large that pattern of everything risky up or down together has been holding.  It felt like that is potentially starting to fall apart this week. 

The first thing that caught my eye, was the difference in performance between credit and stocks.  The CDX IG16 index was actually wider on the week.  It closed at 123 the prior week and finished this week at 126.25.   That is not a major move, but is in sharp contrast to the SPX which was up 4.7% on the week. 

That relative out performance of stocks left many investors scratching their heads.  For all the talk about "credit" leading stocks, or warning signs in the credit markets, they were all ignored this week, at least in U.S. Stocks.

Another thing I found interesting was the CDX HY16 index was down on the week. About -.75%, so not material, but interesting since HYG, was actually up just over 0.5%.  Was the cash market better than the CDS market?  Well, the NAV of HYG was down almost -1% on the week.  Why did HYG buck the trend?  Is the fact that it is a stock means it has buyers that don't exist in the actual world of high yield bonds or CDS?  Something about this move concerns me.  CDS and NAV don't always move the same direction, but the moves in both of those markets match this past week, and seem to match the performance that I actually saw in the junk bond market reasonably well.  That is consistent and implies a functioning market. Why is HYG doing better?  That doesn't make sense to me.

Since Wednesday, many of the core risk-on/risk-off relationships have broken down.  The Euro was up 0.6% ther past 2 days.  QQQ's were up 0.8%.  TLT was up 2% in that time.  Those moves are all consistent with the risk on trade.  But Dax was down -2.5% in that time and the Euro Stoxx 50 was -2.2%.  Gold was actually up 2.3%.  LQD underperformed treasuries, indicating spread widening.  Italian 10 year bonds were down a quarter point, and Greek bonds rallied a tiny bit, but only after big losses, and the 2 year hitting new lows early in the week.  SPX was barely down in the 2 days, but clearly didn't follow the Jobless QQQ rise, and that was with BAC up over 10%.  Oil, which has been confusing, remained so, with prices pretty stable on the week.

Some of this data is impacted by various closing times of markets but there is a clear divergence between credit and stocks, and U.S. Stocks in particular.  Anyone watching the intraday moves can't help but notice that not everything is moving at once like it had.  Is this a function of hedges being unwound or that each market is trading based solely on the maximum pain it is inflicting on its participants?  I really couldn't shake the feeling that by the end of the week, the only asset class trading like it was "risk-on" mode, was the U.S. Stock market.  How long can that last? 

There is a lot of data coming out here and in Europe.  That should drive the markets.  Any residual follow through from Jackson Hole seems like it will weigh on the market rather than propel it, as neither Trichet nor Lagarde provided any immediate stimulus, and if anything, followed in Bernanke's path of a little bit of finger pointing and calling for others to do their job.  I am sure Obama has cooked up a plan for jobs and housing, but I really find it hard to believe that the plans will be particularly credible, or that Wall Street will bet that he can get them implemented.

Good luck, and hopefully the simplicity of risk-on or risk-off will return, otherwise I suspect this will get very messy as so many trading strategies have depended on it.

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Caviar Emptor's picture

It's risky to be "risk on"

Some of the dominos are falling


Earl of Chiswick's picture

Is this guy the next Roubini (before going to the dark side)


From green to red: is Credit Crunch 2.0 imminent?
Satyajit Das

In global financial markets, the signals have changed from green to red. But rather than a simple traffic jam, a full-scale credit crash may be ahead.

Thomas's picture

I never know which trades are supposed to be risky and which are supposed to be safe until the market starts getting all jumpy. Then they just declare anything going up is safe haven and anything going down is a risk trade being unwound. Everything seems so risky to me.

Soul Train's picture

A lot of Friday's rise I believe was just short covering and taking their profits prior to the weekend. And some very short term shorts capitulated in their day trades, and went to the sidelines. Followed by some longs and near term buys/ flips.

Take out Friday's gains, and there is near parity.

Friday's action was just an anomoly. Fact is that the market swung down significantly on Friday and closed up for the day - just a head fake. I look at Friday as a down day and look for continuation. Yep, lots of volatility. That's change for you - we are reversing course from the crazy up ride these past couple of years.

Used to be that the market forecasted the economy by 6 months or so. Boy, those were the days. Shit, nothing could be further from the truth today. Market was dead wrong in the recent up runs.

Now, it's just SMA trending and fancy leverage executed by BOTs via momentum and trending algos, and front running with media hype and the Fed spin. The IVY LEAGUE boys with their fancy screens haven't a fucking clue - just greater fool analysis and divergence wonderments, then leveraging max for the quick flip. Nothing but a casino, and they are lieing to themselves if they try to say differently. It's like watching Marx Brother movie, Day at the Races. What a joke it all is. Fucking Wall Street is a gamed circus act.

The BIG LIE and the first to tell it is powerful. That's what the NYC media and Beltway spinners are for.

Suckers are buying long.

We are going to see the timber fall, like a meteorite caused in Siberia in the early 20th Century. The black swan(s) will appear quickly, and then the mother of all Black Swans will show her face someday soon.


Tune in, and enjoy the ride. More change is on the way. Globalization - gotta luv it.

All the King's Horses and all the King's men, couldn't put Humpty together again.

That, and also the Emperor without Clothes.

Back to childhood for wisdom. Reads spot on these times.





IMA5U's picture

i think we could see performance chasing going into the end of august.  that means more green days.

RobotTrader's picture

Now that the hurricane passed through as a non-event, and all the hysterical scroom - screeching by the news channels turned out to be a false alarm....

Investors could come back cheering on Monday, ebullient about a fantastic Labor Day weekend at The Hamptons....

And everyone could start buying risk assets hand over fist.

And all the guys who have been piling on puts the last 3 trading days could get their postions wiped out within hours.

As you can see, the 21-day MA of the put/call ratio is now the highest it has been in 2 1/2 years.$CPC&p=D&yr=2&mn=3&dy=0&i=p34830204053&a=217031142&r=4693

CrashisOptimistic's picture

The correlators are mapped about 85% to the Euro.  Nothing you had to say mattters.

The Euro news this week will move the market, as it has for months.

Central Bankster's picture

so hows that long nflx, short gold trade working?

Thomas's picture

You can't eat Netflix (except metaphorically, of course).

Implicit simplicit's picture

The tight stops will be eaten up in both dierctions by the machines. Ultimately, the general trend is down. There must be a shitload of stops right below the S&P penant The algos will feast on them.

trampstamp's picture

Hope yo are right Robo...I went long too

WestVillageIdiot's picture

"Now that the hurricane passed through as a non-event, and all the hysterical scroom - screeching by the news channels turned out to be a false alarm...."


Are you fucking joking?  At 1 o'clock last night nobody would have thought that.  I just love bullshit Monday morning quarterbacking by somebody that lives in L.A. and is writing about New York.  This was close to a complete disaster.  Even now the winds are a son-of-a-bitch. 

Thomas's picture

Reminds me of that commercial wherein the fugly, curler headed old check is playing serious balls-to-the-wall Jeopardy--just nailing it--while her equally attractive husband looks on disgust. You find out that she is replaying a tape.

Soul Train's picture

go ahead, make my day. Put your money where your mouth is. And post to let us know how you did next 30 days. I'll try and help remind you.

Custer would be a long trader these days. LOL.


IMA5U's picture

vol is over bought.  i think you are right

Long-John-Silver's picture

Obama's Jobs speech will be President Jimmy Carter - "Crisis of Confidence" Speech

with Shared Sacrifice and eat your Peas shit. Just repleace Energy with Jobs.

WestVillageIdiot's picture

Maliase, bitchez.  Somebody had to.

janus's picture

i was wondering after you (and another new yorker (former ga peach) who shall remain nameless).  good to know you're good.


remember the simpsons episode where the town dedicates a statue to marge (i think in honor of her no-smut campaign), and later thought better of the whole idea; only to recast the statue as jimmy carter with the inscription "malaise forever" on the bottom? 

well, whether or not you do, i just wanted an excuse to express my relief for y'all -- without seemin to be too sappy and all.

Mauibrad's picture

Good comparison and video link.

snowball777's picture

Yeah, Americans never were much for personal responsibility anyway.

My sweater smells like peas.

voshnishki's picture

Does risk on mean more money flowing into gold miners?  Seems to me as if these miners are at oversold levels and close to the period back 2/3 years ago.

The Luftwaffe's picture

The gold mining shares are at ridiculous valuations, and have  gold priced in at about 1200/oz. It's partially understandable because much of the gold demand is coming from Asia, and the Asians have no interest in stocks- just another form of paper to them

DCFusor's picture

Could that be because their hedges have them selling gold at around that price?  There was a time when it might have seemed wise to lock that in...

Alpha Monkey's picture

just another form of paper to them

Because it is.  When governments decide that gold miners don't need astronomical profits, they will tax the hell out of them.  When miner's profits drop, so too will the stocks, and again, people will realize physical assets over paper.

Thomas's picture

All I know is that they are not printing money--their p/e ratios and dividends suck--for companies that mine remarkably valuable metal. I am a big owner of the equities, but these guys couldn't make money if gold went to $5000 best I can tell. (Of course, Barrick is still probably trying to lose money for the bookies, but the others shouldn't be playing a rigged game.)

no life's picture

Don't get me wrong, we haven't fixed a goddamn thing in any economies anywhere in the world at this point... but in terms of successful trading, we are following the same old game plan from last year to the T: sell/get short in May, mayem breaks loose by August and then the big 'stick save' from our friends in government comes in by September.  BTFD. 

No morality, no commeupance for Wall Street bad guys, no nothing (for the forseeable future) so, at least in terms of trading, it is simply a matter of following the idiotic 'story' they are telling..  the (busted) train just keeps on rolling. Choo-choo...

Caviar Emptor's picture

Before 2011, playing with monetary stimulus, fiscal stimulus, bailouts, bank rescues and sovereign rescues (all of which spell Money Printing) seemed rational, sane and proper. 

Now, it's being viewed as playing with matches at a gas station. That's because the world and the US economy have already experienced first hand what can go wrong. And there's increasing suspicion that what we've seen so far is just the appetizer course. 

That's why the Fed had that 'boxed in' impotence feeling at Jackson Hole. It was that conference that was a non-event, not Hurricane Irene. And that's why the Fed is playing hot potato, throwing responsibility for more stimulus to the politicians and Obama. And in Euroland, it's all 1000x worse with all the proliferating rescues melting like drippy candles into a gooey mess. Can you spell 'contagion'? 

The stakes just keep getting higher and higher. Protection, caution and safety are the order of the day. The storm clouds may have passed over NYC, but the figurative ones are getting thicker by the minute

WestVillageIdiot's picture

Actually, it is still pretty cloudy over Wall Street. 

CrashisOptimistic's picture


Another thing I found interesting was the CDX HY16 index was down on the week. About -.75%, so not material, but interesting since HYG, was actually up just over 0.5%.


HY bonds have gotten smacked in August, but this -0.75% week should not be evaluated in raw fashion.  The smackage has been due to massive redemptions, and this past week they stopped.  HY didn't track equities, but they calmed the fuck down.  This matters a great deal.  Calm HY pays big dollars in monthly payout.  It's the up bias on total performance.

HYG is traded intra-minute and it's hard to find an update to its index intra-minute.  The poster has this right about its buyer universe being profoundly different from general HY instruments' buyer universe.  An examination of HYG over a longer multi week period finds that it does regress to the HY mean.  So there's not much to be learned from a 1 week HYG move departing from HY as a whole.

HY bonds, in general, are throwing off monthly money at a 3+% advantage over IG bonds.  This big volatility August is going to end and that 3% advantage will re-assert itself as people search for "safe monthly income/yield".  HY funds are flat YTD and the S&P is down 7ish%, mostly from that monthly payout.

This will be seen and HY spreads will close.

disabledvet's picture

And cash on hand has soared as well. What happens to the "banks can never fail" set should these clowns actually be proven wrong? Where does all that "safe cash" go then?

CrashisOptimistic's picture

Junk bonds have a niche.  People will want yield and that 0% YTD return vs -7% for S&P will raise eyebrows.

We probably also need to keep in mind that every fucking pension plan in the country has to have returns north of 7% or they stop paying pensions and grenades get thrown.  If the market closes the year at these present levels, there will be a yield hunt among oldsters like you've never seen before.

WestVillageIdiot's picture

Cash on hand for the banks is not a good sign.  It means they can't even deploy the dollars they have.  People are complaining about banks charging for checking accounts.  There is a reason banks will be doing this.  They don't need the deposits.  And now that Bernanke wants to drive the long end even lower there is even less lending potential.  What bank would lend out at 4%?  Any change in interest rates and we get an S&L rerun.

Bernanke is saving the banking system by destroying the banking system.  It reminds me of Obama wanting "affordable" housing and "expensive" housing.  Maniacs. 

Caviar Emptor's picture

The paradigm has shifted. We've proven that more stimulus only stokes up biflation and we end up with no growth and higher prices. Globally however, we end up with revolution and geopolitical risks. 

Long-John-Silver's picture

Translation = Same Old Shit Different Day.

espirit's picture

The CHF was overheating as a safe haven asset and is being taken down. Where are we going to put the cash this next week?

Sunshine n Lollipops's picture

My Magic-8-Ball just told me it was the Pound's turn. Who am I to argue?

WestVillageIdiot's picture

The pound will soon be renamed The Ounce. 

Yen Cross's picture

  You may want to rethink that remark?  The Pound isn't part of the E/U ponzi scheme. The Brits have an austerity program on the table!~!! Last but not least, ( They can print money and won't) I'm long GBP ya fool!


   But then again I'm sure you have looked @ the H-4 GBP/USD charts, and the highly under valued EUR/GBP charts?

janus's picture

that's precisely what i've been thinkin, yen.

and unless i'm misreading them, the spreads are painting just such a picture -- every time that bund spread exceeds gb, i think to myself, 'it's all upon us right now'...but until "right now" is an existential thing, the gbp seems the smartest place to park.

those dozen or so miles across the channel make all the difference in the world; and they have since william the bastard set up camp.

think city of london didn't see this coming?  really, it doesn't take a wiz to figure out that the dutch and the spanish have very different economic priorities.  it's only a wonder it's gone on this long.

snowball777's picture

Snorted the whole thing in one go, did ya?

janus's picture

whew...that's a relief.  i was hopin i wasn't the only one whose mind warped in that direction.

and, yes, i did -- it was pledge night brain felt like frozen pancake batter, and it's still not totally thawed.

max2205's picture

For gods sake it was a PPT week. Fridays reversal was PPT work

Bring the Gold's picture

I don't know how you can say the almost "T" shaped rally was anything but natural. Why looking at that chart it's clear billions of dollars of capital instantaneously reversed their thinking and poured an even greater amount in the opposite direction.




Yeah, obvious to anyone who is ready to deal with corrupt reality that it was a FED face saving PPT "rally", just like the FOMC meeting one earlier in August, shape and reversal is nearly identical. +1

ISEEIT's picture

I doubt that it is "falling apart". More likely just changing shape. Correlations are shifting. Causation remains the same.

Buyemall's picture

well some have to put up some money

financials' stockholders maybe?

IMA5U's picture

Well said Peter.  This week was a pimps up hos down week.  One where people that followed credit as an indicator of direction were whipsawed.

Credit investors are usually far closer to the banking and soverign fears that plague the market, so in the long term I'd still bet with credit.  But in the short term, beware the short squeeze.  Sometimes when everyone in credit land begins to get the joke and trades from the short side, it's best not to be short.  Especially on a Fed week.

If the equity market continues to rip credit will reluctantly have to follow as inflating equity cushions are good for credit.  But it will be interesting to see how credit holds up if stocks begin to puke again.  Or should I say if PPT lets equities puke again below the lows they have bounced off of.

chancee's picture

Seriiously, has the author been living on an island for the last two years?  It's pretty simple, the stock market frequently does strange things (usually to the upside) because it is a manipulated joke by the PPT.  Here's the way it works:  During violent selloffs like the flash crash days and the past few weeks, they don't even attempt to come in and stop the fall.  They would just be wasting their money, there's too much selling pressure.  They wait until things settle out and then scower the blogosphere to get a consensus of where major support/resistance is, or better yet, what large scale bearish chart patterns people feel are developing.  And then from there it's easy... just utilize the futures in the after hours to open the market ABOVE said chart pattern or support/resistance.  Why?  So all the tradebots that are programmed bo buy above certain levels will buy... from there, short covering and algos buying will pitifully grind the market higher... and then from there CNBC picks up the baton and starts touting the 'recovery'.

Take a look at the end of May through end of July in 2010 on the S and P and see how many times they tried to open the market higher to negate the selloff.  Finally it took Benny boy announcing QE 2 to send the market higher.  So... my take is look for maybe a little more consolidiation, a little more publicity over the 'pennant' and then expect a magical open higher sometime soon above the boundaries of the pennant, triangle, whatever you want to call it.  Only, without QE3 I expect the 'bullish' move to fail within a few days or a couple ofweeks and we head back down.