Tài liệu Trading Greenspan, Part I(pdf) pdf

Trading Greenspan, Part I
By Tony Crescenzi

Federal Reserve Chairman Alan Greenspan is perceived as an enigma, a man
whose message is cloaked behind a wall of obtuse language. The markets spend
an inordinate amount of time trying to break down that wall, hoping they might at
last find the Holy Grail on Greenspanisms.
But for most, understanding
Greenspan to the point where both he and the Fed are even semi-
predictable, and hence, tradable, is an elusive challenge
. Greenspan is
therefore seen as a distraction to investors who would rather focus on companies
and industry fundamentals than monetary policy.
But Greenspan’s influence is
too powerful to be ignored, so investors must labor over his every word
.

Is Greenspan, in fact, unhittable—throwing the markets curveballs when they are
looking fastball, or is he telegraphing his pitches first?
I, for one, fully believe
that he reveals his pitches so that anyone, including you, can pick them up
before he delivers them
. When you look closely, Greenspan, and the Fed in
general, are surprisingly open and their predictability far less daunting than
legend has it. In fact, the Fed sometimes strains to signal their intentions before
they act. Why they do this is clear (this may come as a shock to some of you):
they are on our side. Incredibly, this is as forgotten as a trip to the dentist.

Don’t fight the Fed; follow them

The old adage, “don’t fight the Fed,” is Wall Street lore
. History is strewn with
periods where the performance of both the stock and bond markets was
significantly impacted by Fed policy (2000 is the most recent example). Along the
way, many investors have either profited from or been harmed by the Fed during
these periods, depending upon the degree of respect these investors showed
toward the Fed’s influence. It is astonishing to think about how often the Fed is
sometimes ignored. This ignorance is usually the result of excess optimism—as
was seen in the midst of the Fed’s most recent rate hikes—or excess
pessimism—as seen in 1994 toward the end of the Fed’s last rate-hike cycle.
Basically, the market sometimes can’t see past its own emotions, but it almost
always comes around.
One important insight into Trading Greenspan can be gleamed by looking
at the bond market’s historical behavior in the aftermath of the Humphrey-
Hawkins testimonies that Greenspan has delivered twice yearly to
Congress
. These testimonies, which are mandated by law, require the Fed to
give their view on monetary policy and the economy to Congress. The detail to
which Greenspan describes the Fed’s sentiments almost always pushes him into
sensitive topics and this spurs sharp reactions in the markets. The below table
illustrates these reactions and provides insight into just how you might consider
Trading Greenspan in the future.

Testimony:

Bond
futures
(32’s
)



February









July

Eurodollars
futures
(ticks)

February









July

Next
closest
Eurodollar




February

July

1993

+7

-5

Unch

-3

-3

-10

1994

+14

-31

Unch

-9

Unch

-16

1995

+30

-58

+7

-5

+8

-8

1996

-68

+43

-13

+4

-13

+6

1997

-55

+40

-6

+3

-12

+7

1998

-29

+18

-2

Unch

-9

Unch

1999

-29

-34

-3

-8

-4

-9

Averages:

(absolute
changes)





33/32



33/32



4.4 bps

4.6 bps



7 bps



8 bps




As the table shows, sharp reactions have generally followed Greenspan’s initial
testimony (Greenspan appears before both the House and Senate—usually just
a few days apart—but the text of his speeches on both days is the same, as is
required by law). The table shows that the front-month bond contract has
averaged an absolute change of 33/32 on the first day of Greenspan’s testimony.
That there have been sharp reactions should not be too surprising.
But what
stands out, and what is the most tradable, is the follow-through; the market
usually continues to move in the same direction as it did on the first day of
testimony and the cumulative reaction is usually double that of the initial
reaction. It goes on: one month later, the reaction nearly doubles again
(also in the same direction).


Ostensibly, the reaction is so sharp because the market believes that what it
hears from Greenspan is an unmistakable reflection of the Fed’s policy leaning.

And since Fed policy doesn’t change on a dime, the market’s reaction generally
continues for weeks on end. Therefore, the next time Greenspan delivers a
Humphrey-Hawkins speech, or any other policy speech for that matter, reflect
upon what he said (read his entire speech!) and gauge your response
. If the
market trades sharply higher or lower following a Greenspan speech, place
a trade in the same direction of that reaction and wait for follow-through.

Give it at least one week
. Reassess after one week but keep in mind that the
markets’ move can generally go on for at least a few weeks.

Employing the use of both eurodollars and U.S. Treasuries has been a
successful approach toward profiting from this volatility. It is important, however,
to choose the area of the curve that appears to be attracting momentum traders
(usually the long-bond, but this spec flow is increasingly shifting to 5-and 10-year
T-notes). Also consider long straddles and strangles on bond futures. Although
both tend to richen in price (due to increases in implied volatility) ahead of
Greenspan’s testimony, the ensuing volatility usually sustains much of the
richness.

Of course, since the stock market pays particularly close attention to the bond
market, similar reactions can be anticipated there, too, especially in the interest
rate-sensitive groups such as financials and consumer cyclicals.


Copyright © 2001 by TradingMarkets.com, Inc.