Ring-Wall ostrich guidance

Ring-wall ostrich guidance  - is being provided by many on the Street, as far as how they interpret both the High Yield 'risk' (of course the keyhole exit really is behind, especially in that investment segment), and as relates to upcoming FOMC decisions and their 'statement' following the meeting. Analysts and economists are paraded in media, desperately arguing how most junk bonds are diversified for liquidity and not problematic relative to what we'd seen with Third Avenue. Be careful; there's more than a whiff suggesting this is a far broader concern, whether held together or not. That's why Goldman today suggested buying; contributing to the broad equity turnaround as well; notably as the S&P went below the November lows. (Many firms will do their own work but are reticent to oppose any directional move Goldman takes; so fall-in-line. I think we saw some of that with today's turnaround as it threatened to go lower, under the November lows on S&P. I'm of course not going to say they issued their statement to shore-up markets.) 

We thought you'd get a snapback after breaking the November lows; running a slew of shorts before the market goes on-hold (or gets nervous jitters) ahead of the FOMC decision on Wednesday and then straight into the enormous Expiration. I heard some say today that there was a rumor about a large Put position and some 'now' say there isn't and that was just a rumor. Well, we shared that a week ago and the market went a lot lower before bouncing. The heart of that story was an early dive, before the Expiration, not simply after (though that' possible too; as well as an ensuing set-up for some sort of effort to stabilize then -perhaps from a low next week- into the end of the year... but that's a possibility for next week if at all). The market remains tentative and dangerous; with traders very nimble. Now, as to the defense of 'junk' and argument that one shouldn't extrapolate on the basis of Third Avenue or other redemption 'gates'. Well it's not so simple to justify dismissing concern, as some of the credit guys are doing. Contagion to IG (Investment Grade) matters as well. The biggest buyer of stocks these last few years are about to be priced away as (cheap debt) funding dries up, removing the biggest pillar of delusion from current equity valuations. With the leverage as used, it's not merely an issue of having a tiny increase from a 'dovish' FOMC that accompanied by a soft (least hawkish) statement.

That is the broad expectation; and as I mentioned in the weekend report, with a better (at least superficially so) Chinese retail number, that supposedly gives a bit more cover for the Fed to move. Given what happened in the Fall after they skipped moving in September, that's a reason for the Fed to move too; and it's better odds than not, that they're not dissuaded by the most recent volatility. (Incidentally several Chinese 'officials' admit to cooking recent books to inflate data including retail sales. Also Beijing is cracking-down harder on any effort to exert speech not supportive of the one-party system. Civil rights are on the decline. At the same time their land-grab, or more accurately land-manufacturing, ongoing in the South China Sea continues, with a very belligerent tone toward a civilian aircraft the BBC chartered to 'test' navigational freedom; and while threatened by the Chinese Navy, fortunately an Australian military aircraft arrived nearby to make the same point. We'll see whether China, in efforts to claim the entirety of the South China Sea, actually engages any of these peaceful probes. The USA with plenty on our plate for now; 'cancelled' a planned 'cruise by' next week.) 

Oddly enough, the better chances for more of a 'relief' rally would occur (that's how the Street is pitching it) if the Fed 'does' hike rates than pass yet again. Do note that, with an increase in so-called 'hawkish' 2016 FOMC voting members just backstage, the Fed will probably take that into consideration to get started rather than pushing it further-out (and more into the political limelight too). For sure, if you're just looking at the middle class, and not booming economies like San Francisco (so strong that it's a bit insane, which may mean unsustainable), you'd have data that would deflect the Fed; but now they're all but committed.   

In sum: I explore some of this (such as institutions generally getting defensive, but suggesting 'hanging-in') as well as the inane debate about whether a hike is now positive rather than negative for markets, and particularly recalling (to see how they view this) what Chair Yellen had to say about the 'high-yield' concerns back in February and again in March 2015. By now, Fed members may regret not moving at September's meeting; so tend to favor going ahead and moving; presuming consequences of not doing so are worse. Either way the market has risk thereafter. This topic is discussed in the 2nd video (below).

Bottom-line: I'm aware we might step-aside or let the market become chaotic if it wants for a bit; in terms of upside. Our parameters on our present guideline attempt to minimize getting too involved with this pre-FOMC / Expiration action because it's incredibly rapid (multiple 10 handle thrusts within minutes once in the morning) and has nothing to do with how it sorts-out. We remain skeptical of rallies while taking a slightly milder approach given a huge paper gain that of course is being protected by the guideline mental stop. The suspicion remains of far lower prices over time; but not all at once, as this is definitely a process, especially given what's involved with the Fed coming up, Quarterly Expiration, geopolitics (hence Oil & Dollar movements) and year-end prospects. Rallies should be unsustainable however. Part of this relates to what I'm calling 'ostrich thinking', whereby economists and analysts are attempting to negate (or throttle) the implications of low-liquidity leading into a credit crisis. By the way I can't blame them for trying to dampen jitters. Why? Because many of the aspects in HY and IG debt potentially have systemic overtones. So when that's the case, one should expect an effort to 'tame' things as best they can.  

Daily action - was pretty wild; especially in the first couple hours; then we got the Goldman Sachs 'soothing' comment about 'High Yield' (actually to be a buyer, which some might think is frighteningly early to proclaim that). Gradually the markets absorbed that; the media shifted into a 'not all are the same' kind of modality; and the very pundits that were bearish 'after' a huge hit late last week, suddenly became passive if not outright bullish. 

This is 'group think' and major institutional influence, which doesn't alter the prospects in the credit markets from the changes that area already in play, and just become validated by a formal nominal rate hike Wednesday. We'll see how this goes, which could be either way daily-basis; and realize the prospects (I've said it too) might line-up for a year-end rally, as I put it, from a lower level to a lower rebound peak. It's very dynamic and fluid too. For the moment we hold short from late last week's move to the new front month March S&P at 2057-58, with a fixed mental stop at 2028 to ensure a solid (huge really) 30 handle minimum gain for smooth trading during a time of chaotic swings (for half the position remaining; we'll address more if need be). If they take that out, and any higher number for the balance of the 2058 short-sale guideline, we'll get back in the swing but probably just in a very limited way, until we get through the FOMC Decision. If 2028 is not taken out we'll just stay with the 2058 March S&P short of course. 

This is a time for traders 'not' to drive themselves loony with pulling lots of handles; as this morning's first hour showed. I remarked how thrilled I was not to be involved in that 'mortal combat' that at one point had 20 handle round trips within a 5 minute span of time. Wow; talk about low liquidity or are the 'machines at war' with each other (automated algorithmic chaos). What we saw early today wasn't investing, and it wasn't trading either. 

Futures are up about 4 points (4 handles) this evening as we near 9 pm ET US. Relatively calm and that's welcomed. Tuesday will likely try for a bit more upside; and could scramble some shorts if 2020 solidly holds any pullback in 'cash' S&P; but again that's a technical battleground and given the dynamics of the next few days no closing level (other than a new low) will have longer-term significance as to the big picture. 

I wouldn't really be against getting a really strong rally; just doubt we will. A strong rally all the way into early 2016 would be awesome; we'd take all the downside gains; be thrilled about it; and look for the market to hit a big 'brick wall of resistance' early in January. That would not only allow trading yet-another short from a higher level (with lower risk than at lower levels, because there's no really bullish market alternative further out) but also it would allow the VIX to drop-back and test last week's lows and one could then look for a new kick-off to another VIX rally too. However, I'm not at all convinced we'll be so lucky as to get a super-duper short-term upside run.

 For now we hold short; no guideline changes yet.