Bonds, Bonds, Bonds. That's all the rage these days. I mean, everyone is talking about Bonds.
People are flipping out about the market Volatility, and scared to participate. It's to the point that the 2 year is yielding freakin' 0.46% and still getting gobbled up!! I guess the mind frame is "I'd rather get 0.46% guaranteed in 2 years than risk losing 15% in 2 days in the stock market."
With that in mind, my inner contrarian red alert siren is going bonkers. With all the press Bonds are getting, it's only a matter of time before the hype fades. Will it be a bubble burst? I think not. I don't think this Bond situation is a bubble...just panic leading to huge demand for low risk investment opportunities (if you can even call 0.46% in 2 years an investment). I highly doubt there will be bubble pop resulting in a rapid drop of in Bond prices, more like moderately diminishing demand which will result in moderate downside pressure in bond prices.
How am I playing the Bond situation?
I tried getting Short Bonds via a very small position in TBT a couple weeks ago, but it wasn't working so I cut my losses and moved on. I intend to continue watching the action in /ZB, TLT, and TBT. Once I see some sort of stabilization in upside Momentum in /ZB & TLT, I'll set some alerts at levels that may interest me in trying a TBT position again. Until then, I'm steering clear of the contrarian trade, and have even gone with the masses via /ZB on a couple intraday occasions.
When was the last time you remember Bonds being such a hot topic?
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An interesting article was shared with me this morning. The article noted the extreme lack of Volume this August as compared to previous August trading sessions. Get this, the first 16 days of August 2010 showed an average daily volume of approximately 818 million compared to 1.6 billion during the exact same time period in August 2007. That's a 50% reduction in average daily volume!! Furthermore, 2010 boasts the lowest average daily volume reading since 1999.
So, what gives? Shouldn't the increasing ease and decreasing costs of executing a trade result in increasing average daily volume?
Intuition says yes, but we all know the market doesn't like to play the intuition game. My best guess is fear. People are flat out scared of stocks. They are putting all their money into Bonds, CD's, mattresses, etc... Volatility has become the norm, and regardless of solid earnings the market is unable to hold gains. Domestic and Global economic hardships won't let the market sustain upside action. Money Managers & Financial Advisors can't get a grasp on the market, so they are shifting people to safer assets for the time being. Baby boomers have diminished risk appetites due to their age. Plain & simple, it's rough out there for Equities.
One thing is for sure, the fact that the "Whales" are on vaca can only explain a portion of the dimished volume.
What do you blame the lack of volume on?
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Capital Preservation is the name of the game during the month of August! The month is half way over, but it's never too late to take these words to heart.
What do I mean by Capital Preservation? Simple. The price action is thin and Volume is light. This results in diminished probabilities of success on trades, meaning you should lighten up on your size.
I have averaged a cash position of approximately 60% for the first half of the month, and I intend to do so for the remainder. I have placed trades here and there, but have been nowhere near as active as usual. Furthermore, when I do place trades my position size is at most half the size of my typical position size.
September should offer an higher volume environment which will increase trade success. Until then, I'm staying heavy in cash and light in size.
Preserve, Preserve, Preserve.
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