Dec 15, 2004

A Short?

Posted by Hello

Click on the chart to see a larger image!

With lots of chart showing positive momentum I thought I would buck the trend and show some negative momentum. ROP appears to be consolidating beneath its 50 day average and looks like it will head towards its 200 day. The recent narrow range makes for nice risk management.

Today my thoughts keep drifting back to a story on the newswire yesterday that the yield curve was now as flat as it was in 1998. That is the 2-yr to 10-yr spread is now at 1.16%. This shift in the yield curve is really difficult to relate to the strength in equities and especially the financials which are trying to lead the tape higher today. To reconcile these two views inflation will have to evaporate while economic growth continues. Maybe this will happen but it is difficult to understand why it would. This is even more difficult to reconcile with the banks as ebbing inflation would renew the risk of deflation which puts their loan portfolios at risk.

It makes a lot more sense to me to explain the moves as stocks flying up as corporations borrow at low yields to manage their stock prices via buybacks and mergers while banks benefit from fee generation. This increases the exposure of the stock market to even a slight bump in corporate yields and it is happening while the bond market looks like it is anticipating an economic slowdown.

A good trade here might be to pair an equity short(probaby in 6 month options to limit the risk) with a curve steepener.

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