Nov 27, 2004

A New World Order

Posted by Hello

Click on the chart to see a larger image!

This chart of U.S. 5-yr yields against the dollar index shows a definite change of character since the U.S. election. Except for a brief separation in March yields and the dollar moved up and down together. Now they are flying apart. The relationship could revert in the short term but it does not really seem very hopeful. So far the dollar has performed much worse than bonds but I would expect that bonds will catch up (fall that is) in the weeks ahead.

In my first entry on Oct 16 I wrote, "Obviously I am looking ahead here and am still very open to changing my mind (say if the yen trades below 103/$ in the next month) but to me the global imbalances are showing signs of correcting in an orderly fashion." When I mentioned "changing my mind" I was referring to my generally bullish stance on the stock market and economy. The yen traded below 103 on Nov 18. The equity markets still seem alright and the sideways range of last week lends strength to the idea that we are entering a momentum market on the upside but the dollar and yield movements are giving me the willies.

Though the market momentum may last a bit longer I am getting the feeling this will end badly. Higher prices in the face of bad news can be a sign of strength but they can also be shorting opportunities. I entered some shorts in December equity puts the week before last and have been accumulating Dec and Jan UST puts over the last month. While my views are shifting here, rather than change them wholesale I will stick to my original strategy with each trade. The equity puts are all short term and whether we rally or fall I will be out of them next week. The bond positions are fundamental and longer term but I am hopeful that I will get to book some profits there shortly and roll out the trade maturity.

I will begin looking for some positions in long dated out of the money puts now and may enter into them over the next month. Nothing big just something to put my mind at ease and that I can add to over time and if my conviction increases. I don't have much conviction in my short term views here (probably the poorest feel since I began this blog a month ago) so I am focusing a bit more on longer term trades. I would still like to accumulate some cyclical stocks on a pullback and some precious metal stocks seem to have underperformed the dollar move.

No comments:

Post a Comment