Momentum

The "risk-on" trade took it on the chin last Friday. Bernanke's comments succeeded in diffusing some of the sentiment on QE2. From the action in equities, it is clear that a very large and aggressive QE2 program is priced in.

In addition, speculative activity in gold, oil, copper, and platinum are ALL at record levels. This is becoming a very crowded trade. There is more speculation in oil today at $82 than there was at the peak of $145.

Momentum is the only thing driving markets forward right now. It's time for me to consider taking my IAG and NG positions off the table, and even SDRL. I will stick with my bottom-fishing expeditions in DJSP, GAP, and COCO.

I will stick with bonds, despite my fear that Bernanke is now more likely to disappoint risk markets on the extent of QE2. The reason is that there is still a net speculative short position in the futures market on the 30-yr Treasury, and if Bernanke disappoints on QE2, expectations may shift back towards deflation. In addition, the increased inflation/devaluation expectations have pushed down short-term yields at the expense of long-term in the last three months. If there is a QE2, there will be more dollars in the future. Due to increased supply, the 30-yr bond loses value, and yields appropriately go up. So despite what Bernanke said about not buying long bonds right away, QE2 would not do much to lower yields unless he does buy them. And does Bernanke really want to push up mortgage rates now? All of these considerations make me want to hold on to the bonds.