When considering technicals and fundamentals it can be hard not to have an opinion as a trader, but you have to go in with a game plan, avoid overthinking it, and go where the tape tells you, Dave Floyd, founder of Aspen Trading Group, told Ed Harrison during today’s Real Vision Daily Briefing.
Floyd expressed interest in trading 10-year notes to the downside and said he sees the 2-10 spread steepening a bit, possibly going up to around 60 basis points from where we are right now. He said that will put downward pressure on treasury notes and noted that 5-year yields are currently making multi-year lows.
If we close below 30 basis points by Thursday, the overall outlook based on historical data suggests there will be some mean reversion, anywhere from 20-25 basis points on the 5-year note so we could see rates bump up, which helps his short 10-year note idea and also suggests there could be sector rotation out of large-cap growth into mid or micro caps.
If we get that to play out, he said, investors need to be aware of that as a trading opportunity on notes and maybe start rotating their portfolio or looking at small caps to find some technical levels that make sense. Floyd said that is the trade no one is looking at; everyone is focused on money going into the big caps, but he thinks it is worth seeing. “Let’s close 5-years below 30 basis points this week then we start fresh,” he said.
Floyd acknowledged that the Fed is distorting market signals with all the liquidity and buying and the possibility of yield curve control and said that the effect throws earnings estimates and the ability to trade markets fundamentally and technically out the window.
At some point that may be a problem, but right now the market seems to like it and it is pushing asset prices higher. You have to take the temperature of the market each day and trade what you see right now, he said, despite the fact that the Fed pumping money into the system may distort how you’d normally interpret the market.
Liquidity is moving things higher and you’re trading in that moment, but long term, there are things to be concerned about and you have to be mindful of that as a possibility, Floyd said.
“When the deck stacks up, you figure out how to get ahead of it or pull back exposure.”
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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