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EMC and the 30-Year Bond: Have We Only Just Begun?


EMC leaves behind 11 years of frustration, while the warning flags on the "rounding" long bond top are multiplying.

It ain't over until the "credit lady" sings, and for now she's not even in the house. The corporate bond market's torrid march upward continues unabated and with no end in sight. Here is a sampling of our credit tells:
  • US 2-year swap spreads (USSP2) at 26 bps
  • US 5-year credit default swap (CDS) at 33 bps, near the lowest in 2 years
  • An average of subordinated bank debt CDS 26 bps tighter in the last week
  • $5.4 billion of new issuance on Tuesday, with a HY deal upsized from $500 million to $1 billion
  • $2 billion in two separate issues of 5- and 8-year debt issued by Sprint (S) in late February (hardly a quality name) trading 200 bps tighter
And I could go on for a while. It's awfully difficult to spawn bear markets when companies keep getting handed money for nothing. I'm not saying it makes any sense, and we know there is no value added in companies that give back cash to shareholders in the form of dividends or buybacks, but when JPMorgan (JPM) stock – with all its 3.8 billion shares outstanding – gets driven up $3 in three minutes after Jamie Dimon decides to front-run the Fed stress-test announcement, is there really any room for analysis? On to the tradable.

Just before the 1:00 p.m. results of Tuesday's 10-year US bond auction, I was chatting with a sharp bond Minyan about the look of the long end of the curve, and what the post-auction behavior would reveal. With the yield up from 1.92% to about 2.10% in less than two weeks, "Minyan C" suggested that a good auction would be needed to support the trading range we've been stuck in for months. I suggested that the chart of the 30-Year Bond (US1) shows a textbook rounding top, and it has been years since we've seen the US1 with a negative sloped 50-day moving average. The 10-year auction turned out fine, but by the end of the day the US1 gave up another full point and is now itching for a clean break out of its range. Just as the demise of the yen has been predicted by many and for many years, so has been the collapse of the US long bond (I'm guilty of predicting both). The yen has no room left before its 5-year trendline gives up the ghost, and the US1 is having a tough time despite the Fed's "twist" being aimed right at it. The key to both these trades is to have the staying power of being there when they finally hit, because when that happens, they can be the trades of a lifetime. (See Is Now the Time to Short the Yen/Dollar? for past chart commentary on the long bond.)

On the equity side, Monday I posted on the Buzz & Banter (subscription required) about buying a decent size of the EMC (EMC) April 30 calls (to go with my already large stock long) despite my nearly genetic aversion toward chasing names on the run. But try as I might, I cannot find another blue-chip with the combination of industry- and company-specific growth prospects (search in Google for IDC's storage industry forecast to get a sense of where this space is heading), balance sheet, and "hidden" value (VMWare (VMW) stake) like EMC. And then there are the technicals.

On a traditional chart, this week the stock has made new 11-year highs. That's not the kind of thing that goes unnoticed, and in a large, liquid name like EMC, it can create its own self-fulfilling demand. I do see the multiple red-flashing DeMark sell signals on weekly and monthly charts, but I will counter with a daily chart which shows a "qualified TDST Level Up" breakout, a failed TD Sequential Countdown Sell signal, and the current count sitting on an embryonic 3 for a TDST Sell Setup. Put the DeMark daily backdrop together with the obvious bullishness of the traditional chart and that's the reason I'm OK in rolling the dice on some short-dated calls. Mind you, I put in the sell orders in scale as soon as I got filled – time is not on my side – but if I can make a $0.50 return on a $0.50 basis, there are worse things in trading.

Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
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Positions in EMC, US1
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