Market Anthropology: L’enfant Terrible

Wednesday, September 7, 2011

L’enfant Terrible

In my candid opinion, stepping into your contrarian best should only be reserved for special occasions. Market events such as weddings, funerals, baptisms and graduations come to mind. Wear these suits on a day to day basis and they will surely loose their influence of opinion towards your respective trading postures. 

Judging by the headlines and daily musings of traders in my twitterfeed, it appears most designers are bringing their stormy gray to midnight black tones to the fall fashion scene this year. 

This style, which was universally chic in 2008, has piqued my contrarian heartstrings to go with a decidedly more eclectic styling that says, “Ruffled – but smart.”

I am also bringing this contrarian motif to what many traders perceive as a distinct bear flag/wedge formation that has been tracing since the crash lows in early August. What has brightened my perspective for the time being is the outperformance since the early August lows of my high yield equity proxy of FCT (see Here for an explanation of its utility on my screens).

The hyper-smart market musings of Howard Simmons makes a number of excellent points in his latest note regarding the recent blowout in option-adjusted credit spreads. 

“What we saw over the past six weeks was a Pavlovian reaction to bad news; investors sold first and asked questions later. That they fled into Treasuries (see Treasuries Approaching Zero-Coupon Status) was not much of a risk reduction, but it felt like a risk reduction. Viewed in that light, the rising credit spreads, for high-yield bonds especially, should not be viewed as an intrinsic increase in systemic risk but simply as a transfer of risk from a scary-sounding label to a safe-sounding one.” 

This opinion, coupled with the sharply decreasing outflows from high yield bonds, may simply be an indication of a panicked tape, rather then an underlying sea-change in risk appetite. Considering these instruments typically trade as a leading indicator for the equity markets, a contrarian perspective towards the bears argument may just be the l’enfant terrible to this years fall fashion show.

* Further reading – see (Here)