The bulls are all pointing out that we are near the bottom of the trading range, that 1,120 has held multiple times and the economic data isn’t so horrible. The bears on the other hand can point to a myriad of problems that have the combination of not having been resolved, but too many investors hoping they will be. The market has priced in too rosy of a situation. The bears also point out that the data is marginally better, but still pretty awful. Finally, from a technical standpoint, if 1,120 does get broken, 1080 or so seems to be the next stop.
We were sitting here last week, and got saved by a few positive tape-bombs. Will we see that again? I don’t think so. The ISM news isn’t good enough to take us much higher. There are too many investors who are long largely because of the “support” at 1,120 that it will take a significant beat to have much of an impact.
HYG has resumed it’s sell-off. High Yield might be getting cheap, and HY17 is starting to offer a lot of value, but HYG seems rich. I continue to believe it has some signficant catch-up and it looks more and more like the portfolio is getting filled up with failed flip trades from hedge funds. The bulk of the increase in the portfolio is from new issues done in the past 2 months. It is beginning to look like dealers, who get caught supporting their new issue, are the ones who buy HYG and JNK so that they can exchange their overpriced, illiquid bonds, with something they can leak out into the market. We are doing more work on this, but I think the “strength” of HY ETF fund flows may be very misleading. More and more I like leveraged loans. With LIBOR so low, most have very low coupons (though LIBOR floors help that), but the price is getting low enough there is some potential upside from here, and if the market gets worse, the senior secured nature should help. Unlike 2008, there is far less leverage in the leveraged loan market (Total Return Swaps and Market Value CLO’s are a much much much smaller part of the market), so the benefit of seniority should kick in a lot sooner than 2008, when the legendary long LCDX short HY in massive size roiled the market for weeks on end. It did create incredible value for anyone was willing to play it at the time and wait for some normalcy to return.
I have to stop writing now as my mom is calling to see if I bought 1,120 because even she knows the market ALWAYS bounces off 1,120. Hmmmm……I think I will actually add to my short since I don’t think we hold this.