Headline Risk..

..or How I quit day trading and learned to love the Tape Bomb.

"What are you buying right now then, Kevin?" The tilt of this question, a common follow up after I explain my disdain for the belly, speaks volumes to the operational bias of market analysis. After 4 sessions of liquidating retreat, the bond market is allegedly, "Leaving the station" for higher rates. Maybe, maybe not, either way the track will be twisty. I heard a lot about it leaving the station in Dec too, only to see the Great Rotation morph into one of the top performing sectors of the quarter.

The reality is violent repricing on certain data release dates has shifted participant risk to adjusting to the effect. Players looking for higher rates were enticed into curve flatteners to offset the carry consequences of their ideas. As we noted last week, it is not uncommon to be wrong on direction and bailed out by the curve. The Employment report is driving a reduction in this position and the long end is feeling the heat because that's what's "owned". I would not say the "market" is anymore liked, or disliked than prior.

If you look at data releases in terms of volatility, or range, then a interesting consequence of Fed openness has developed. Fed days and Employment days (and we believe soon Retail Sales days) become the "equivalent" of 4 to 5 "regular days". This means position reduction (usually considered the prudent action) into these events can alter capture by as much as 1/4 of the month. It also means that position size away from these points needs to ramp up to accommodate for missed opportunity if your "risk management" is to be out when they print. It also means that short dated option products that encase these releases provide interesting "bets" to get a piece of the drama. Guess what? That is exactly what we are seeing in the futures markets.

Don't read to much into movements prior to these releases that are driven by liquidation of large holdings unfit for headline risk. If you want to play on data ( its an addiction after all), adjust your size to 1/4 or 1/5 of "normal" and think of it in terms of "days." Above all, stick to your discipline and plan. The disciplines may vary but the plan is to still be trading on Monday.

 

 

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