Spread Compression Time With ES "Fair Value" About 15 Point Lower

Tyler Durden's picture

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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mynhair's picture

Might have to hold it into Monday, though.  Seems everyone has evacuated.

narapoiddyslexia's picture

Excuse my ignorance, but how do you, "long the Contextual Risk leg?"

HelluvaEngineer's picture

Not sure it's as important this time, frankly.

redpill's picture

Couldn't tell you, I'm still dumbfounded as to why this stupid stock market is green today.

HelluvaEngineer's picture

Didn't this happen last time Bernanke disappointed?  I seem to remember the floor falling out shortly thereafter.

Cognitive Dissonance's picture

Sell the rip. Disappointment will arrive Monday along with the pumping out of the NYC subways.

WestVillageIdiot's picture

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. 

slaughterer's picture

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

slaughterer's picture

Yup, last time the floor fell out for two days after the JH EOD rally. 

espirit's picture

Compare $CH30 and $INDU - at resistance.

freethinker4now's picture

I know. Goes up on printing speculation. Then goes up when no printing? Skitzo

blingblingbert's picture

Man, have you not heard about the invisible hands?

pvzh's picture

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

B-rock's picture

...Buy TZA...


Or TZA Sept 2 $50 Calls.... ??

nobusiness's picture

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.


French Frog's picture

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

disabledvet's picture

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."

arm50's picture

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.


gguillory75's picture

huh?  is that buy 12 sh LQD, sell 9 sh IEF and 4 sh SPY?  What's the "/4" part?

citrine's picture

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.

Rick64's picture

Maybe or they're waiting for the selling to start.

WestVillageIdiot's picture

Like a fucking idiot I bought some puts on QQQ today.  I can feel my ass getting rimmed.  Anybody else as stupid as me? 

--Freedom--'s picture

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.

slaughterer's picture

The floor will fall out next week, do not worry. 

disabledvet's picture

I do worry. I'm a worry wart. And a mr. fidget as well.

WestVillageIdiot's picture

Not if it is with a tire iron.

economists_do_it_with_models's picture

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.

nobusiness's picture

I actually caught the low today within 45 seconds.  trouble is I bought IWM Puts.  So yes I'm just as dumb as you.

slaughterer's picture

The gap between ES and risk will be closed in futures before open on Monday. 

Cognitive Dissonance's picture

Spread Compression Time With ES "Fair Value" About 15 Point Lower

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?

anynonmous's picture

speaking of twister

WTF happened to operation twist and extended duration

all the prick did was extend the duraation of the next FOMC

centerline's picture

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.  

SheepDog-One's picture

Doesnt take hardly anything at all for them to pop ES .5%, big deal, the dump is coming soon.

centerline's picture

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.

TwelfthVulture's picture

Many moons ago I was taught to trade the INITIAL market reaction to Fed announcements.  Initial reaction this morning was violently down. 

AnarchoCapitalist's picture

It will come. The market needs to go lower before Bernanke's hand is forced.

So Close's picture

15 mins ahead of you.  Finally.  ;-)

centerline's picture

I dont think one of these trades has failed in a very long time.

Zeilschip's picture

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. 

WestVillageIdiot's picture

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. 

B-rock's picture

Hey, it's been a while...  How ya'been Compression Trade?

WoodMizer's picture

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.

besodemuerte's picture

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.

Zeilschip's picture

Maybe someone can paste the CIX formula from Bloomberg into this thread?

disabledvet's picture

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?

John McCloy's picture

  Im looking for that EUR to nosedive 

kahunabear's picture

Nah, everybody's buyin' the huge economic benefits of the hurricane demolishing the eastern seaboard.