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Spread Compression Time With ES "Fair Value" About 15 Point Lower
Time to reestablish some compression trades. As the latest update from Capital Context indicates, ES, relative to its risk benchmark consisting of all other risk assets, is once again along in its optimism, trading about 15 points above its implied fair value. Paradoxically, the driver of today's bout of irrational exuberance is not the latest monetary stimulus announcement by the Fed, which obviously did not come, (and it may be time for the daily dose of sobriety: without fiscal and monetary stimulus Q3 and Q4 GDP will tumble; good luck buying stocks on contrarian bent when even the NBER admits we have entered a double dip), but merely "buying the news" - supposedly everyone was convinced there would be announcement by the Fed, which in itself was a catalyst to buy?! Regardless, the buying is only happening in stock as can be seen by the ES. As such it is time to put the trusty old compression trade back on: short ES, long the Contextual Risk leg.
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Might have to hold it into Monday, though. Seems everyone has evacuated.
Excuse my ignorance, but how do you, "long the Contextual Risk leg?"
Not sure it's as important this time, frankly.
Couldn't tell you, I'm still dumbfounded as to why this stupid stock market is green today.
Didn't this happen last time Bernanke disappointed? I seem to remember the floor falling out shortly thereafter.
Sell the rip. Disappointment will arrive Monday along with the pumping out of the NYC subways.
It might be interesting trying to get back onto Manhattan Monday. The PATH, Long Island RR, Jersey Transit and subways could be very difficult. Even Metro North could get screwed up.
And yet the NASDAQ just keeps climbing. Yoga pants, burrito joints and even banks are just going straight up. As is gold. The dollar is dead.
People want to be fully invested during the hurricane so that they can rest assured that their money at least is in a safe place. /sarc
Yup, last time the floor fell out for two days after the JH EOD rally.
Compare $CH30 and $INDU - at resistance.
I know. Goes up on printing speculation. Then goes up when no printing? Skitzo
Man, have you not heard about the invisible hands?
I'm still dumbfounded as to why this stupid stock market is green today.
1. Hurricane -- Bullish (lots of broken windows).
2. Stockpiling on stocks (they are non-perishable too, and unlike gold you can eat them ;-) ).
/ sarc off
...Buy TZA...
Or TZA Sept 2 $50 Calls.... ??
I love this trade.
Out of the money call options on a triple inverse of the most volitile market the small caps with only 5.2 trading days left.
Nice.
Posted a few times but still awaiting some sort of reply ....
Dear ZH,
I'm very much enjoying those arbitrage trades between the ES and your RISK index. I suspect that the vast majority of readers or traders in here do not have access to a RISK chart let alone being able to trade it.
It would be good if you could run some charts to see what other more 'common' instrument is currently the most corelated to the RISK index (it used to be Aud/Jpy I believe).
Once we know that, I feel that more people would benefit from this info as you could then do the pair hedge/trade with minimal risk (ie. short ES & long 'that' instrument), rather than simply going for the more risky 1 trade (in this instance, short ES, as many people have probably been burnt shorting the indices 'naked', especially when one remembers the many meltup mondays that we've had).
Just a thought, because the 'easy money' title is only correct IF you are able to trade it in reasonable safety by being hedged.
Thanks in advance
Or just buy gold of course. Sometimes it really is all about the entertainment value...as in "u followed our advice and lost everything? HRdy Har Har!" something tells me " they aint broadcasting from topeka here." one more thought: if i have a billion dollars in the bank or a billion dollars worth of gold which do i get back if the bank fails? Not that banks fail of course. At least that's what the government guy told me back in 2007. "Banks dont fail anymore."
the spread is (12*lqd-9*ief-4*spy)/4=x, can be found on their site. It is a good trade, just eats cap req.
huh? is that buy 12 sh LQD, sell 9 sh IEF and 4 sh SPY? What's the "/4" part?
As Tyler mentioned at the beginning, the risk leg of the "Context" index is a basket consisting of risk assets. Few weeks ago he let us know what is included in the basket, but I can not be completely certain at this point.
Maybe or they're waiting for the selling to start.
Like a fucking idiot I bought some puts on QQQ today. I can feel my ass getting rimmed. Anybody else as stupid as me?
Bought some sqqq when the NASDAQ was at 2.5% up, so am even today on that. Can't fucking believe it will close that high, but who knows?
Nice move in gold, though.
The floor will fall out next week, do not worry.
I do worry. I'm a worry wart. And a mr. fidget as well.
nevermind
Not if it is with a tire iron.
Not stupid at all. Look at the 3yr chart of SPY:$DAX on stockcharts.com.
Things have gotten so far out of line that it's pitiful.
Setting up for another major 2008/flash crash type correction.
I actually caught the low today within 45 seconds. trouble is I bought IWM Puts. So yes I'm just as dumb as you.
patience
The gap between ES and risk will be closed in futures before open on Monday.
True.
I'm no longer flexible enough to play those Twister games. But I could try something close with Mrs CD tonight if that's OK?
speaking of twister
WTF happened to operation twist and extended duration
all the prick did was extend the duraation of the next FOMC
Yeah. Total nothing burger today. I guess I could say I am bit confused - but really nothing surprises me anymore. I suspect today is a deer-in-the-headlights moment. I don't think any of the markets know how to react right now... all looking for some sort of direction. Sort of like the volume lately (aside from bursts of selling activity), the bots are levitating the market in abscense of actual volume trading.
Doesnt take hardly anything at all for them to pop ES .5%, big deal, the dump is coming soon.
I wouldn't want to be long into the weekend. As such, a minor selloff could be in order this afternoon. Compression trade should be complete here in the next hour or so.
Many moons ago I was taught to trade the INITIAL market reaction to Fed announcements. Initial reaction this morning was violently down.
It will come. The market needs to go lower before Bernanke's hand is forced.
15 mins ahead of you. Finally. ;-)
I dont think one of these trades has failed in a very long time.
Unless Trichet and Lagarde pull a rabbit out of their hats this weekend, I can't see how the two-day September FOMC hopium can carry this market permanently higher.
And gold is laughing at Bernanke once again. Go ahead launch QE3 at the FOMC meeting. We can get the DXY into the 60s. We can get WTI over $100. As much as I have difficulty admitting this I think the American public is waking up. Add to this Obama's coming handouts and the groups such as "The Tea Party" are going to be handed a lot of power back to them. The ridiculous blame they took over the "debt hole" debate will wash away like a pigeon on The Hudson this weekend.
Hey, it's been a while... How ya'been Compression Trade?
Is the physical premium the difference between apmex spot and paper futures on the comex?
i know it's off topic, but gold over 1800 caught my eye.
Excuse my ignorance, but what exactly is the .CONTEXT Index? I love watching these trades over the months but I don't know what the hell that Index is. I've seen these done before with other benchmarks, maybe I'm just falling asleep at the wheel lately. Thanks.
Maybe someone can paste the CIX formula from Bloomberg into this thread?
Sure. It's a trade "put in context." as in "this is really good" when in fact in the immortal words of the Goldman Saxony "it is shit." any other questions?
Im looking for that EUR to nosedive
Nah, everybody's buyin' the huge economic benefits of the hurricane demolishing the eastern seaboard.
This Cat 3 turns into a mild thunderstorm tomorrow.
Yep. Unless you believe weathermen are correct 95% of the time. In that case you also believe in pixie dust and unicorns that shit skittles.
Forgive my phraseology, but how the fuck do we get a move like today's without some typr of correction and yet, thus far, it just doesn't want to know.
HFT mungous?
DavidC
Algos and stocks in general are "dumb" and can take some time to figure out wtf is going on.
Gold caught a bit of a bid, back up above 1800.
Option settlements for gold&silver coming up...
sorry Tyler, i just bought the SRTY - that'll kill any short side risk
the only volume came on early selling. the people have left, it is now just the hal 9000 at work.
Precisely, I was just looking at the IYR chart and the same shit there. It's firmly in the lets-ramp-the-living-shit out this slot now.
It looks like the old DJIA holding pattern at 11.3K to me.
+350 DOW today. As if they give a shit whether it's legit or not.
Fing Machines
Ghost rally by the few traders left on the floor...
Funny crap from Bbg today. One headline says US stocks rally because The Bernank & Beard signalled eCONomy doesn't need immediate aid. And another headline saying European stocks tank because The Bernank & Beard didn't give all the starving junkies one more shot.
Now where can i sign up for a job like that? Write some shit, no matter what, all day long, smoke some more crack and call yourself a journalist. The quality of the reporting is plunging at a rate similar The Bernank & Beard is adding to the endless lies.
When the system itself is a lie, the representation of it (here, the Bloomberg "crack smoking" journalism) must also be a lie to be accurate with the system.
Where can you sign up? Pretty much any media outlet in the country. I worked in media for a while, and it's amazing how clueless these folks are. I often see references to a media conspiracy, and there is one, but only at the very top. Most people actually working as journalists aren't in on it...they are just clueless and trying to keep their jobs.
Close enough...
Do you think that those jounalists know and understand anything?
I can answer that one too: "cnbc." what else u all got this day? I'm drinking a Hurricane and feelin GOOD!
But please can someone tell me why the market is up and Gold is up and oil is flat!
Thank you
Gold flat? It's up 2.5%...just hit 1810.
Whoops. Misread your comment. Thought you were saying gold was flat as well.
Market?
$ down might be a reason why everything else is up atm.
As to oil, don't worry; they are trying to punch through record-levels Light-Brent spread.
These divergence signals seem like they are never wrong. 100%. Thank you for sharing.
Krasting had some pretty well thought ideas of how this might play out - I am looking forward to his follow up this weekend - hopefully he gets it posted before he loses his power and internet
Correct me if I'm wrong, but- last time the FED had a scheduled announcement, didn't it take the market til about 3pm(EST) to figure out that BennyBuxx didn't announce QE3?
cant this also converge to the upside?
Sure, if there is volume creating it. This is all robot fumes.
Of course it can. It is irrelevant which way it compresses, as long as it does. It also means that trading just one leg can be hazardous to one's health.
Define "it." are we talking money here or Stephen King?
Important caveat: I once traded just the ES side of this compression and got burned. Make sure to do both legs equal weighting.
Any way to play the risk leg using an ETF?
I use index etf's. Careful with the leverage.
ok so..TZA for the /es what do you use for the risk basket?
TNA, UPRO, UDOW, whatever is a long play. I stick mainly with RUT and S&P index plays.
I am also margined, so i have no settlement reqs, so when im out, i have a full pipe ready at all times.
If your not margined, i advise caution with the levered plays.
thx guy
It has been my experience that on light volume days the spread tends to close up, longs side wins, and closes down on heavier volume days, short side wins.
Of course, i forgot to check volume, and picked the wrong side. Shit happens..
Well the PPT stock ramp did its job and traders are too confused as to what to do. The ramp up has all the looks like a computer signal. It looked like someone tried to intervene but then just gave up and let the program run. There was a definite pattern in the morning trade from the top and bottoms of each jump:
Dow: Up 133 down 46, up 126 down 46, up 120 down 58 and then period of gyration then back up 120 points
Nasdaq: Up 45 down 13, up 31 down 14, up 27 down 14 gyration then up 25 points
S&P: up 20 down 5, up 13 down 5, up 11 down 5 with the same gyration and then up 14
After the fourth ramp up stocks have been gyrating around the same levels since noon. Every single metric across the board followed nearly the same pattern at the exact same time. Individual momo stocks followed the pattern as well as crude.
Are we supposed to believe that a massive quantity of individual investors all bought and sold the exact same stocks at the exact same time and bid the exact same percentage across the exchanges???
Where is the SEC??? This is madness.
I just looked at the time of the top and bottom of each jump. Across all three exchanges and the crude futures each jump and drop occurred at the exact same time. I don't have access to the millisecond but here it went:
Dow, Nadaq, and S&P and Crude
Bottom 10:08
Top: 10:28
Bottom: 10:38
Top: 10:48
Bottom: 11:00
Top: 11:16
Bottom: 11:30
Top: 12:12
The tops and bottoms of the moves in crude matched perfectly until 11:16
Can someone explain how that can happen??? Other than total manipulation.
ETFs, basket trading and HFT. It is all still legal under the SEC.
Thank you Tyler! This type of information is SO valuable.
so let me get this straight....
the market goes up 5% off its lows this week in anticipation of QE3...
then when QE3 isn't announced, the stock market goes up?
me cornfused
Perhaps they needed a "reason" for markets to go up with no volume or fundamentals- so they used QE and POMO etc. else there would be loss of confidence in the markets. Later, they would have to break that conditioning to give the illusion of a real market.
Today, they don't need a reason for markets to up with no volume or fundamentals. That is the conditioning that is now allowed/accepted, and is built into the markets.
Evident in this kind of wordage/story at MW today-
“There seemed to be a high amount of anxiety that he’d say something that was going to scare the markets, but right about when he started speaking, whatever the market was worried about seemed to go away,” said Randy Frederick, director of trading and derivatives at the Charles Schwab Center for Financial Research
so let me get this straight....
the market goes up 5% off its lows this week in anticipation of QE3...
then when QE3 isn't announced, the stock market goes up?
me cornfused
Give it a few hours... or a day or two.
That's easy Mr Fart! "The whole game is rigged i tell u! Rigged!" what else we got?
You're not alone mate.
compression ON
For us newbies....any chart comparisons that we can bring up to simulate this es risk spread...I only have access to stock charts.com but can do all the fun stuff on it. Thanks again for a great site.
Looks like the rollover may be starting. Almost dumped my QQQ puts, but gonna keep them for awhile now. GLD looking good
I'm thinking some GLL in case of another margin hike.
Can anyone post a link or give an idea of what assets make up the risk basekt and fair value (Contextual Risk Leg)? Are they the same thing?
Thanks . . . .
Use the search box up top.
Whats with the Cramer ad? My son, You are as conflicted as Private Joker wearing a Peace sign and writing born to kill on his helemet. Now answer my question or youll be standing tall in front of the man.
Watch the bastards close the spread in AH.
What was that? SPY just threw a large red open candle.
Thanks for the easy $2500 Tyler, im done for the week. Y'all enjoy the Obamacane over the weekend!
OK, that was 3.38% since the alert. TZA.
HFT dump began right after this ZH post. This has become f*^$g ridiculous.
Tyler et al. You guys absolutely rock. This is the second such trade I've made on this advice from you guys, and you turned a big red day into a (barely) green day. I can't thank you guys enough for being an honest port in a sea of bullshit.
Why will nobody post how to replicate this spread on a chart for us beginner people....please or what program is best to create it. This site is full of good comments but little to no education....thanks to anyone who can help
This isn't something easily replicable with a retail trading account.
Search is your friend. Or just construct your own basket.