Friday review

With futures down heavily pre mkt (skittishness over stalemate in Washington), USD had a bid and my EUO position was looking nice, up >1%. Treasuries were also bid up on risk aversion. Treasury market has been extremely volatile over the past week, yet range bound, but this move higher constitutes a break out to the upside, and I was thinking TLT could possibly test highs we saw last month. This counter-intuitive move higher in treasuries (most would expect higher rates when the US is on the brink of defaulting on its debt) tells the real story of what's going on: no one believes the US is going to default, so treasuries remain risk free. Because of the high volatility, I've been staying out of TBT, one of my favorite plays of 1Q, and with this push into treasuries, was looking to buy TBT on a dip.

The GDP miss at 8:30 AM (1.2 vs 1.8 expected) crushed USD, and EUO promptly reversed, breaking 17 on the downside. The miss also sent treasuries even higher. With fear returning to the market, I expect more and more pressure on Washington to come to an agreement over the debt ceiling issue, so I was looking to build longs on any significant weakness in equities. I was also looking to short gold on news of a deal, because I think general uncertainty as well as a weaker dollar (especially vs the Swiss Franc) has been the main catalyst for its breaking new nominal highs. Short USD, and consequently long commodities, has been a very popular trade, if not a little crowded, and I'm beginning to position for a USD short squeeze on news of a deal. Even if the debt ceiling is raised, new provisions towards fiscal responsibility and possibly even a balanced budget amendment to the constitution will provide USD support. Also, what I think a lot of people are overlooking, is the Bernank has ended QE while the ECB has essentially started QE with their bond buying programs. This also favors USD over the Euro.

So on my watch list: TBT, DZZ, and FAS - on a bounce in equities.

At 9:39am - for reference SPY opened at 128.91, down 1.31

SPY bottomed at 128.36 (records show a 127.97 low, but that is a BS print). Because I didn't get to see my low target on SPY, I had not started building my longs, even though it would have proven to be very lucrative. At some point, rumors hit that the GOP had submitted a plan that would actually win votes - equities bounced big time and gold sold off. I jumped into FAS and DZZ but was too late as I ended up selling both at the end of the day for a small loss. My attention turned to the bond market - bid for treasuries was inexorable.

At 10:24am

At 10:33am

At 1:52pm

At 3:21pm

Ended up timing the squeeze nicely, although missing TBT bottom by 0.15 or so. Flipped TBT for a quick 100 bps on the bounce.

Here's an intraday chart of TLT - notice the break out above 97.45 level.

Thoughts on long term treasury action in next post.