Last week I posted that the stock market looked OK, except if rates got to 5%. Well it just about happened today! Now what? Note that stocks are about the same level they were, even though rates are up almost 20 basis points.
I think this means 1/ The upside is somewhat capped for awhile and 2/ volatility will continue to increase. I've continued to increase position in CBOE VIX futures. My guess is that these may be good even without a sharp retraction. The market is getting confused on how to interpret the current situation, and vol should go up more. I've been adding in a nearer month - Aug '07.
I've never had more arguments about a position than I have had with my short copper trade. No one likes it; some get mad. They all make the arguments about China, India, etc. My guess is that these are in the market. As I said, I may be premature, but maybe not. Also, there is a big (and very savvy) long in the market. I think he is aware of how illiquid his position is, and is scaling out accordingly. He was dead right at the bottom; in fact he was part of the reason for the long copper trade at $2.50. Of course this market is in backwardation, so there is a cost to my position.
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