I sat down yesterday in our offices across the street from the Chicago Mercantile Exchange for a chat with veteran bond trader and popular educator and trading coach Jack Broz. Jack often drops by after the bond market closes to get coffee, draft his next newsletter, and answer questions from clients and participants in the IM Pro chat room, where he is one of the moderators.
Once he was done, I asked if we could just record our typical Tuesday afternoon conversation instead of doing a formal article. Actually, I just turned on the recorder, but he knew it was on. I think. Anyway, he gave a wealth of insights and ended with a surprisingly confident and specific prediction for the rest of the year. Read on.
A lot of people, both actual traders and pundits, are predicting a drop in the S&P 500, which you follow. What do you think will happen?
As we sit here right now, the S&P is below 1690, which I think is a crucial price. Going beneath that means we’re [likely to see more] downside. Near-term I’m looking for 1669 in the S&P. It certainly could go as low as 1656.
Now, if it makes it back up to 1690 and holds there, it makes this whole [downward] move just kind of a head fake. Back over 1690, I’m on the up side. I’d look for it to take on the high of 1705.
And above 1705, I mean, I have targets up there. There’s a 1741. If they re-show me strength, I’m not going to say, “Well they can’t do this,” and just sell it. Because obviously they can do it.
So the drop to as low as 1656 could be a head fake. That means the head fake could be a pretty big move. A 30-handle head fake?
Well, my point is that because the movements are so massive, thirty handles isn’t really anything. To me, the bears have done something by taking out 1690. Now, if the bears are really going to take control, they’ve got to get below that 1669. If they do that, then they should go to 1656. I have stuff that’s lower, but that’s a pretty good start. I’d need to check my charts but I think there’s a 1626; that’s a pretty important number.
It’s funny how so many of our numbers coincide. Almost every time we talk and you mention a level, it’s significant for me, too. Even though we’re coming at the charts with very different methods.
That’s why the MTS [IM-Pro chat] room is so cool.
What is your outlook for other markets, and in your case, bonds in particular?
I turned bearish on the bonds on July 31st. If you look at a chart since then, it’s just kind of going sideways, but the tops never really took anything out that damaged the move.
Today, we’re starting to fall back to the downside. There are points I’m looking at. In the bond market, we’re dealing with the 3.75 yield, which was 132.21. Let’s start with that, because that’s going to tell you what’s going to happen.
It did go a bit lower today, but yields are so massive that it could be 10 or 12 ticks on either side as they fight over it. So make that the first thing: Who controls 132.21 in the 30-year bonds?
Because down below, my target on this move is 129. In other words, three points on this move. And the next hurdle really is this yield, [then we can] break this thing down.
Now, on the upside—and again, I’ve got to visualize my newsletter and my charts—133.15 is going to have some importance. But where this big downside move starts potentially to get in trouble, that’s like 135.23 or 135.25.
So we could move three points right here and I’m still more inclined to find strength and sell it because we have triggered this move to 129.
You trade based on price levels. But do you even think about things like quantitative easing when you’re planning your trades?
To me that’s all built into the market already. And I think that’s something that a lot of traders have to get away from. When did quantitative easing start? Wasn’t it around 2009?
So the market pretty much knew that was going to happen, probably in mid-2008. And it was built into the prices. And I think newer traders–or maybe just traders–have to remove themselves from that and just say, the market has already built that in.
Here’s another buzzword or phrase that I’m curious to hear people’s opinions about: flight to safety. As stocks drop, are people going to go to gold, bonds, or something else?
I’ve always looked at the bonds as a safe-haven bargain and I think the world still does. So if the stock market weakens, I do think bonds are a safe holding place to put their money.
There’s constantly money flowing between these markets, but to me the idea of safe haven is when there is major world unrest. People start to say, “Where will my money be the safest?” and as messed up as we are, we’re still a pretty safe country. So the money goes to the bond market.
How are you advising your students and clients and the people in the chat room to prepare for whatever may happen?
Well, the thing that we are, first and foremost, is traders. My clients just want to trade. We try to think of the bigger picture, which, in both S&P and bonds, is a little bit bearish.
So if we get into a market short, we maybe a little more aggressive in our position size and in holding that trade. That’s because our short term picture and our bigger picture have kind of lined up.
But if you end up getting into a scalping session where there is much more of an upside bias, the market’s telling me it wants to go up. So I’ve got to buy it. But the big picture is bearish, so I’ve got to buy a little bit smaller. I’ve got to be more of a scalper. I’ve got to be more careful.
So you’re looking for the convergence (or divergence) between longer term and shorter term?
Yeah, ideally we get that [convergence]. The last two days (Aug. 12 and 13) in the bond market we’ve had that. Our bigger picture is bearish and our shorter-term picture was bearish. It makes for a smoother trade.
You feel a little more confident putting your shorts on. I know the question you’re asking, but it’s as if this office (points to room) is the market and we’re trying to trade just that (makes 4-inch circle with hands).
Because there’s the potential for some bigger moves, my clients who understand options or spreading may come to me and say, “You’re really bearish about this, aren’t you?”
And I just tell them, “Yeah, I am.” Because I know that they’re thinking of working with options or a spread, which is very doable for a long-term trade.
Did I answer your question?
Yeah, you did. OK, this is the bonus round. Is there some bit of wisdom that you return to at a time like this? As we go into fall there’s going to be uncertainty, maybe a big drop in stocks. Is there something you go back to in order to deal with that?
For me, it’s almost a welcome situation. When I was new on the floor—I can’t even say I was a new trader because I was terrible—there were so many tremendous moves. When Long Term Capital Management blew up and…I can’t think of the other one, but there were these huge moves that I was not taking part in. I didn’t have the ability to. I didn’t have the money to. And I remember thinking, “Wow.” The list of those is like this (describes tall stack with hands).
But as I’ve become more…seasoned?…with the markets, it’s like, “OK, this is going to be a very good move in the market. Let’s be ready for it.” It’s more kind of that thought.
I do think, since you brought it up, that people have to be aware. They’ve been flocking to the gold market, when the big moves were. And to the crude market, when the big moves were.
Well, no one’s flocking to the bond market. No one’s beating down my door. And I tell you what? They’re going to miss it. The move the bond market’s going to give up and the trade you’re going to get are going to make gold look it was stagnant.