I’m trying to decide if last week’s post-FOMC rally was (1) a “reading comprehension fail” by the markets, (2) unbelievably aggressive positioning/expectations going in, (3) or something else.  “Something else” always makes me a little nervous.                                                                                                  – CA March 26, 2016

It is becoming clear that there is “something else” going on in the interest rate markets.  We have seen an increase in long positioning in the JPM client survey.  The top three candidates for the additional bullishness are: (1) pricing in of less fiscal stimulus than expected, (2) Article 50 next week, (3) French election positioning, or (4) “something else”.  We also have another reason to think there is increased long positioning.  In particular, we’ve had some suspicious bullish activity in the UK afternoons (where some of the larger hedge funds are located).  [Disclaimer:  Idle Speculation Ahead]

In the chart above, I show the hourly price moves since the Fed meeting on March 15.  I have boxed the candlesticks for the time between 6:00 am and 11:00 am CST. It seems too much of a coincidence that we get a surge of buying every morning for 7 days in a row in the US, typically heading in to the European close.  There is no information from the ED open interest.  So if it is not a coincidence, then a large gorilla is trying to create a game dynamic (since they could have quietly bought rather than make it so noticeable).  It’s possible some momentum algos catch on and cause this effect to increase.  The pattern has been strong the first few days.  Then on Tuesday we got that “catastrophic 1%” decline in equities and fixed income went nuts.  So it’s possible that on Wednesday the gorilla decided to take advantage of the trend and cause a small break to take profit.  On Thursday we got that strong New Home Sales number – you can’t expect an “aotbe” trend to ignore the data.  But the pattern has been clear.  What is not clear is if this is some kind of daily P&L print grab, or some quarter-end play, or “something else.”

I don’t expect this pattern to continue indefinitely.  It seems to me that we may get this type of effect for the start of next week.  Next week is another quiet data week, except for Friday’s PCE.  It’s possible this effect could be related to quarter-end, which ends on Friday.  And we get Article 50 on Wednesday, so this move may be related.  You can consider doing some of the following for the next few days if it fits your view and your book:

  • We are nearing some resistance levels on fixed income, so having some core bearish positions make sense. We’ve just been zig-zagging all year.  The short-squeeze catalysts we have mentioned in the past (Article 50 on Wednesday, French elections, less stimulus prospects, Greece, etc) could get us a little further.  If someone is going to be trying to jam us towards the high end of the range (or possibly through it), it couldn’t be so terrible to hedge bearish trades in the morning, and looking for a pop to unwind.
  • If you aren’t bearish, you could just take a controlled long position (non-linear long structure or trading with a tight stop) in the mornings, and looking for a pop later in the mornings to unwind. You don’t have to wait until 11 am.
  • The US afternoons and evenings have seen dips more often than not, despite the rally. If you have core bearish positions, this may be a better time to “let them run,” or to put on that bearish trade you have been eyeing.  The exception would be Wednesday, where we get Article 50 invoked.  You may not want to have a ton of bearish positions that day in thin overnight markets.

The main thing we want to watch out for is anything that could look like a catalyst for a break in the pattern.  Clearly if they are going to go through the trouble to set up something like this, it’s so they can take advantage of it later (like a weak payroll to unwind).  I was on the fence about sending this comment out earlier in the week – mostly because trying to predict a short term small move in direction is rarely much better than a 55-45 bet.  Then we got that crazy reaction to a small drop in equities.  We seemed to have rallied too much and they looked to be unwinding.  But taking a look back, the aggressive pattern of early morning seems to be intact – just not always through 11 am.  I just want to present the evidence.  You should make up your own minds on whether there is some signal here, or it is just noise.

I’m the “Curve Advisor” and not the “Punting Advisor” so I will usually refrain from putting out short term directional commentary.  Let me know if you like this type of “analysis” and I can try to put out some other things.  But I thought this particular trend was interesting – especially in a game-theory context.