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The Ugliest Faucet

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Action in stocks these days is all about what's happening in fixed income markets. Traders are re-pricing Treasury bonds and notes not just for the starting of Fed "tapering" of large scale asset purchases (LSAPs), but also for future interest rate hikes. That's forcing "reach for yield" managers to unwind previously easy positions and risk-parity hedge funds to reallocate; last week saw a big blow up in a Brevan Howard fund; and if you add in the intentional liquidity drawdown in China, it's not hard to see why traders are eschewing equities. Talking about the fundamentals of individual stocks and other assets right now is like arguing about which kitchen faucet is better when your pipes are busted.

You're going to see a rush of technical analysts and market watchers pointing to key levels and sentiment indicators, etc. today. In the options space, the implied volatility of CBOE Volatility Index (VIX) options popped up on Friday, put/call indicators are at extremes, and so on. Really, all your favorites deserve a mention. But all those indicators are lagging - not predictive - primarily because equity market sentiment is just a day-late response to what's going on in bond markets.

Several Fed governors - the plumbers - are making speeches this week, and maybe one of them will be deputized to speak in a way that changes the market assessment of Fed policy. Until Treasury notes settle, though - until this liquidity clog is cleared - there's no reason to get worked up about all the second-order effects and chart patterns and so on.

Cash is usually the ugliest faucet: it doesn't do anything, and loses value over time due to inflation. Right now for traders, it's the best of a set of bad alternatives.

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