Support & Resistance Levels for multiple time-frames on the on the annotated charts below. (Click on graphs to enlarge. May need to click a few times to get to full size)
S&P Dec Globex 7:45 AM
If you really did know the future, everyone would think you were crazy anyway.
Yesterday, 2 unrelated “happenings” came to light in FI Markets. First, the silly. After a well intentioned long period of warning, the CME Group altered the delivery basket for the Classic to account for the 5 year window from 2001 to 2006 for which no standard issue existed. Months of meetings and discussions failed to soften the 10 point higher repricing of the illiquid contract for next June. A paltry 1600 contracts traded and the slaughtered will, as usual, fade into obscurity. Unlike the “leaked” stopping of issuance announcement, where well known players bought wildly before the release, this move seems to have little to cheer.
Harley Bassman (super bright mortgage analyst) emerged from the shadows at PIMCO to pen a typical “Must Read” on the Eurodollar term structure (I know a guy that writes about that a lot, I heard he was awesome) and implied vol for those slopes. I won’t attempt to paraphrase Mr. Bassman’s great writing in my irreverent and pedestrian way, just read it here:
However, between the lines rests a very direct push back to the huge position that Bill Gross was holding. Essentially, BG was long the strip and short the volatility. As the color coded lines show, BG was betting that a steady state of roll down would increase the price AND converge the green vol to the much lower red. Bassman argues that a long position should also be LONG the red vol.
Discussing this oddity with GRD ( @Groditi on Twitter ), we noted that without a robust MOVE future, yet, Hedgies and Specs caught out in the FI squeeze and stock market air pocket down had no alternative than to buy VIX during the event. The present pricing indicates this insurance was also no bueno. The apparent disconnect between the strip and the implied vol also shows the decimation of FI trading desks has allowed situations that would have been “arb-ed” away much earlier to fester and morph into anomalies, correcting violently sans liquidity…..as indicated in event 1 above.
Take heart, if you did know the future, no one would believe you anyway.
As we indicated last week, the interest rate volatility coincided with a massive drop in OI. This morning’s JPM Client Survey showed a huge jump in NEUTRALS.
The run off destroyed positions aligned to FG and the Fed dots. The survey shows that turning the positions to net long will not be easy. Eurodollar open interest trends toward the prevailing fixed or floating orientation of end users. Convincing finance operators to Pay Fixed does not jive with the general milieu.
It seems the “guide” at the head of Forward Guidance turned out to be Stork from Animal House, and the Band marched right into a dead end.