giorsims
Short

The irrational market

ICEEUR:CB1!   Brent Crude Oil
News:
http://www.bloomberg.com/news/articles/2016-04-16/saudi-prince-sticks-to-oil-freeze-ultimatum-as-iran-stays-home

There is a clear relationship between oil             and prices. As the main source of energy in production activity, an increase in oil             can lead to a lower consumer prices, thus, deflation. With central banks mandates to adjust interest rates to inflation level and expectation that the rate will go up when there's inflation , correlation with oil             prices suddenly became higher lately and it impacted the stock market too. As lower interest rate means that bonds with lower variance will gets higher prices and investors will switch their investment from stock to fixed income market.

Currently, we are in earning seasons. But with lower price expectation, companies now faced two-sided pressures: lowering finished good prices and the inelastic production costs, especially from employee salary. Being squeezed, valuation analysts have to recheck their valuations with the latest oil             development and it's very likely many stocks were overvalued

As some of you noticed, IMF cut its forecast on the same day of the oil             bull run last week. But the market didn't pay attention to it. It is on the edge and try to get a grip on anything they can, even the false news published that Russia and Saudi had cut a deal. Even if they had, it's not stopping production, but keeping the production capacity as it is.

Market has always been irrational most of the time and that's how there's arbitrage. As front-month future price has breached it's BB-Band top-line (20 days, 4 std dev) and OVX             ( oil             volatility index) started to increase, I would go short at this moment on market on general. I confirmed the same pattern on SPX/VIX and STOXX50/VSTOXX. And I also spotted quite the same thing for CBOE             10Y swap rate/SWVIX as well (http://www.cboe.com/micro/srvix/).

Good luck and godspeed next week!
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