Volatility can make one do very strange things. Just when it seemed like the market had found its groove Friday morning, things reversed at about noontime. The yield on the 10-year Treasury has declined sharply Friday, but remember that is "sharply" in bond market terms. At 3.14%, the 10-year yield has decreased by 11 points from its recent high. While the long-end of the bond curve is a pricing benchmark for corporate bonds and mortgage loans, and influences rates for other consumer purchases like autos, one needs to step back and look at a longer-term chart, not engage in the myopic forest-for-the-trees mentality that grips the Street.
A year ago the 10-year yielded 2.32% and five years ago it was yielding 2.54%. As weird it sounds to an old-head like myself, we are entering uncharted waters in terms of rates for this business cycle, and that has the markets roiled. I don't think that's a one-week phenomenon.
So, I did some more trading today, and the balance of this column is paraphrased from an email I sent to my asset management clients. Those emails tend to be in rant form, but I cleaned this one up.
At the risk of sounding like an addict, I just bought some more VIX ETNs. This market is just not holding a rally. After a huge start, we have fizzled hard - DJIA was down, and then up again, after bouncing 350 points at the open - and that tells me that the selling is not done despite strong earnings from the big banks this morning.
So, after swapping out of (TVIX) into (UVXY) and then agonizing as it flipped and flopped this week and we lost all of it (at very nice profits, to be sure) to trailing stop-losses, I bought (VXZ) this am.
I went for VXZ this morning because it is composed of medium-term VIX securities. The VIX curve is highly inverted today (this month's contract is much more expensive than future months' contracts), showing that investors are worried about the current maelstrom but assume a pullback. Usually the VIX curve is shaped in the opposite way.
So, something has to give. Either short term VIX declines and the bulls have their way, or people realize that higher rates ARE a rally-killer and today's bond market rally (which isn't very strong, anyway) dissipates. If it's the latter we will have another very good week next week.
The only thing I can predict with certainty is that at some point next week, likely more than once, I will go absolutely bananas watching the markets. It's what I do.
Guru Out...for now.