Weekly Crow Tickers: Feb 17 - 21

Picks of the week

Image 1. The big drain.

The chart above gets much doom posting going. Yes, it is an important metric of the available bank liquidity in the system. Yes, capital markets rely on it for smooth functioning, especially in times of stress.

At the same time, the ‘big drain’ of repos by the Fed in the overnight market operations (OMOs) represented in the chart resulting in a low not seen in years isn’t particularly troubling… yet.

Yes, the market was well supported throughout this time - you could argue the significant run up took off around peak of liquidity on the Fed’s balance sheet. So is this the beginning of Fed tightening, even as interest rates fall? Well not quite. Don’t forget the Fed’s TGA - its cash balance - at well over $800B dollars. The Fed’s balance sheet is nearly 25% of US GDP.

Plenty of punch for the party.

The Ten Year. TLT

What if?

What if the Fed wants the markets to cool off? What if the intent was to see liquidity go elsewhere? What if draining liquidity from the system drove flows into less risky assets, for example bonds?

Finally, what if this was a way to get the market to lower interest rates, if the Fed can’t do it?

Let’s take a look at TLT this week.

Image 2. TLT weekly chart

This could very well be the time of positioning for a longer rotation, now that higher lows have been put in on the weekly. Not to mention a solid cleanout of long inventory last week. Take a look at the chart above. I think as long as the midpoint of the buying tail around 88 is supported, we could see some upside into next month.

Image 3. TLT 4h chart

How could I play two scenarios?

a) Little to no time spent below 88 and a close over 90 would likely see 92 tested as early as this week. The Feb 21 89c at 0.60 may be a more aggressive (small) play for a double. Personally, I would be targeting next March 92c monthlies (Mar 21 exp) to buy more time and take advantage of further upside.

For a true rotation play, consider the Dec 100c around 1.75. A b) scenario as the one shown above may present a great entry opportunity closer to 1.40-1.50.

b) I am not a fan of puts here, unless it is to hedge an existing position. The Feb 21 88.5p at 0.24 may be considered for any spike with no follow through early in the week. Anything later in the week would need to buy more time.

The following tickers could see a more immediate payout, however.