Stocks vs. Bonds: Who's Right? (w/ Michael Purves) | Trade Ideas

TL;DR

Michael Purves discusses the divergence between the bond market and the equity/credit markets, suggesting that both may be a little wrong in their pricing. He recommends a trade idea of buying July 14 strike put options on the VIX for a possible decrease in volatility.

Transcript

JUSTINE UNDERHILL: Welcome to Real Vision's "Trade Ideas." Today, we're sitting down with Michael Purves of Weeden and Co. Great to have you back. MICHAEL PURVES: Thank you. It's always great to be here. JUSTINE UNDERHILL: So last time you were here, which was early May, you were looking at the market and you were bullish on banks and somewhat bear... Read More

Key Insights

• 💡 The trade idea suggested by Michael Purves is to buy July 14 strike put options on the VIX, anticipating a decrease in volatility.
• 💳 The bond market and equity/credit markets are divergent in their pricing, with the bond market being more pessimistic about future growth.
• 🌐 The global dynamics, particularly the bond market in Germany, may be influencing the pricing and behavior of the Treasury market in the US.
• 😣 The trade tensions and weak rest of world growth may be impacting the data and causing some softening in the US economy.
• 🧑‍🏭 Technical indicators and other factors suggest that volatility may decrease from current levels.
• 💡 The VIX trade idea provides a risk-on opportunity in case the markets consolidate or experience a bullish trend.

Questions & Answers

Q: Why did the previous bullish trade on banks play out while the bearish trade on utilities did not?

The easy money on banks played out because the equities and risk assets remained constructive. However, the bearish trade on utilities did not work due to a strong bond rally and declining bond yields, which affected relative valuations.

Q: Why is the bond market pricing in so many cuts over the next year and a half?

The bond market may be overreacting and importing some dynamics from Germany that may not be relevant to the US economy. However, weak global growth and trade tensions may be contributing to the bond market's pessimistic pricing.

Q: What factors suggest that volatility should decrease from current levels?

Factors such as stabilizing Chinese currency, collapsing MOVE index, and improving technicals on the SPX charts indicate a potential decrease in volatility.

Q: What is the biggest risk to the suggested trade of buying put options on the VIX?

The biggest risk is if the VIX goes in the opposite direction and increases, which could happen if there is an ugly G20 summit or a hawkish stance from the Federal Reserve.

Summary & Key Takeaways

• Michael Purves had previously been bullish on banks and bearish on utilities, but the trade did not play out as expected due to a strong bond rally and declining bond yields.

• The bond market and equity/credit markets are diverging in their pricing, with the bond market suggesting weaker growth and the equity/credit markets remaining more positive.

• Purves suggests a trade idea of buying July 14 strike put options on the VIX as a way to potentially profit from a decrease in volatility.