Charlie McElligott at Nomura:
Despite a really fragile macro backdrop of “higher (and tighter) for longer” which continues to bleed growth sentiment—yet against an “FCIeasing” driven by risky-asset reflexivity on the perception that “growth slowdown” will see Fed back-down from their ongoing “hawkish” rhetoric—weare in the midst of an angst-ridden pain-trade higher in Stocks which is pushing us back into increasingly “unstable” FOMO-type behavior, because nobody is there for this move…
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And the truth is, there is still absolutely further potential for incremental “Upside Equities” flows from here, due a number in technical / mechanical /sentiment dynamics beginning around SPX 4200 and beyond, as more mechanical / systematic re-allocation increases likelihood of capitulation frominvestors who are missing this violent rally off the lows
The punchline here is that much of this continues to be “un-economical” and / or “mechanical” behavior which the risks creating a potentially “false optic” for increasingly desparate investors who do not have performance or positioning, which now in-conjunction with this very erratic and illiquid backdrop, is driving a resumption of nascent “red flag” behavior in recent days
o “Spot Up, Vol Up” behavior in Beta, High-Growth & Retail
o Enormous capitulatory “short-squeezing” in “worst-of” names / sectors / themes / risk prem
o High Volumes / Prem spent in OTM Upside Calls
The perverse “risk-on” –led FCI easing of the past month + period(Equities gap up / Vol gap down, Credit Spreads rage tighter as Real Yieldsabsolutely collapsed on stop-outs of crowding “inflation overshoot” trades into a market which then tilted towards “growth slowdown /recession” focus)continues to be an issue for the Fed—because it is actually contributing to an “easier” economic growth backdrop at thesame time that they are attempting to go “single-mandate” on inflation, via an attempted “demand destruction”
Looking at the Bloomberg US Financial Conditions + Index(“includes all the elements of the BFCI index,as well as indicators of asset-pricebubbles, which also have an effect on financial conditions—These include tech-share prices, the housing market, and deviations from equilibrium yield levels),this recent “impulse easing” in FCI puts us, INCREDIBLY, back at levels seen prior to the first Fed HIKE of this cycle back in mid-March
Not completely attributable—but certainly not hurting the cause then—is the evidence that US economic data is doing “goodenough” against this “less tight / easier” FCI backdrop:
o ISM Services showed New Orders and Employment higher, versus Prices lower
o Factory Orders beat and have again risen for the 9thconsecutive month, with May too revised higher
o Durable Goods final print was revised higher too, versus “unch” estimated
o And of course, this is all against the much-discussed “Prices Paid / Received” survey rollover that is lending so much “peak inflation behindus” confidence
This is untenable for the Fed—and accordingly, the Fed rhetoric has again turned more vociferous in an attempted push-back of both this“too easy” FCI as-well-as the market’s “dovish” pricing of EASING seen in early ‘23
For this reason, and now that the market has indeed / rightfully reset the terminal rate higher over the past few days(from 3.25% now ~ 3.47-.48% per FFOIS), the best trade on the board in my mind continues to be fadingthe early ’23 “Fed easing / rate cut” bets currently “averaged in” across 2023 STIRS, which the market has rightfully begun to do, after the Fed clapped-back at “dovish pivot” claims with a constant stream of“hawkish” rhetoric the past few days…accordingly, we have removed 60% of a full “Fed cut” already, as EDZ2-Z3 steepened from -77.5bps to the current -62.5bps
That is simply because there is a big difference between a “dovish pivot”—particularly as traders’ have been conditioned to believe that means “rate cuts and large-scale asset purchases”—versus a Fed which in reality IS that rates are going to have to stay “higher for longer” due to still too hot Labor and Wages
The Fed is set to simply downshift the pace and magnitude of remaining Fed hikes…BUT, those hikes are set to push us into outright“restrictive” territory, even IF they go down to “regular” 25bps hikes on a “predictable” schedule, until we get that true signal that inflation is close to target again…as “higher for longer” is the game now
Whacky stuff to be sure. But not unusual for a crazed ber market rally. The Market Ear:
Seen this before? The year started with a sharp move lower. We got the first bounce and then the next leg lower that was followed by a furious squeeze. Since April we have basically seen the same pattern play out once again. The moves are almost perfect in percentage terms. The “ideal” set up would be an overshoot and a try of the big 4200 level, accompanied by a real volatility puke. That would open up for some tail hedge opportunities… Refinitiv
YOLO call traders are back with a vengeance If this is the start of a new trend or not is to be seen, but retail options boinanza seems back. GS on the first hour action yesterday: ” Some eye popping stats during first hour of trading today…6.3 out of every 10 options on the tape today are calls…this is a year to date high and approaching levels seen during retail option craze of 2021…”
One of the things to watch should the retail options craze come back is for volatilities to stay bid/move higher despite the market moving higher. This is what we saw during several occasions when retail was punting hard. We are not seeing that at the moment, not yet at least.
Retail radar Retail traders bought $2.1B this past week. At the single stock level, retail traders bought +$510MM this past week. Single stocks have recorded positive order imbalance five out of the last six weeks, in a sign that retail interest in singles is gradually picking up again. Retail Radar
You know it is “squeeezy” when even ARKK is moving higher Time for the updated ARKK dot.com chart. More pain for all the new “smart” shorts and then another puke lower? Tier1Alpha
The 4th squeeze is the deepest The 4th squeeze of the GFC bear market was more than double as strong as the previous 3 and took SPX 18% higher. The 4th squeeze of the tech bear market was more than double as strong as the previous 3 and took SPX 21% higher. Kantro
Dumb money is back If this is just a bear market rally, the dumb money indicator via Sentimentrader could prove to be accurate once again. Bear in mind that the 60% level has acted as a reversal level in 2022, but during longer bull periods we have seen much higher values in the dumb money index. Sentimentrader/Authers
Horrible first 6 months as the buy signal… The previous 5 “worst 6 months’ start to the year” all saw equities rally for the second half of the year…Best year saw >50% return…(admittingly in the 1930s…) Compound
Déjà-vu all over again – and it is bad news for the bears A familiar feeling – but that is just flipped on its head? JPM Position Intelligence team says the current set up (post the July SPX rally of 9%) seems like the opposite of what we saw in late January after the 9% sell-off.
JPM: “Back in late Jan, anecdotal rhetoric was mostly about BTD, positioning was still arguably high (e.g. L/S nets still around 72nd %-tile vs. 5yr history), L/S performance was challenging as there was nearly 100% downside capture, CTAs were reducing long risk, non-L/S funds were adding to gross, and riskier stocks were underperforming a lot, but the SPX had yet to fall as much as it had when risky factors had fallen this much.
Today it seems the rhetoric is mostly about selling the rally (STR), positioning is still low (5th %-tile for Eq L/S nets), there’s very little upside capture in performance, CTAs are reducing equity shorts, non-L/S funds are de-grossing, and riskier stocks are outperforming a little, but haven’t nearly as much as they have in past rebounds.
Thus, given the current set-up, it wouldn’t be surprising if the short squeeze extended further, particularly among riskier stocks” (JPM Position Intelligence)
Hedge fund net leverage still very low Nets still at 5%-tile. JPM
Divvies: what recession? Over the past week, 56 S&P 500 members announced new dividends in line with their previous payouts, 14 companies announced hikes, and there were no new cuts or suspensions. News were positive overall, with material upside from several energy companies’ variable dividend programs, and a surprise large hike by Ford. JPM Quant
Goldman: what recession? Goldman says we are not there yet. “Despite last week’s Q2 GDP release that showed growth contracting for a second consecutive quarter—tripping the rule of thumb that two quarters of negative growth constitute a recession—we don’t think the US is officially in recession. We note that the indicators that the NBER places the greatest weight on for determining monthly and quarterly business cycle peaks have all continued to increase, as gross domestic income rose in the first quarter and nonfarm payrolls have continued to grow at a rapid pace. And while labor market data has historically lagged other economic indicators, we find that it would be historically unusual for the labor market to appear as strong as it is at present even at the very outset of a recession” (GS)
Can the world really get scared of the most scary PMI scenarios? The bears love to bring out the PMI charts. How bad will this have to be to actually surprise the market to the downside? Macrobond
How about some PE multiple expansion? MSCI World P/E and US 10Y real swap rate. Macrobond
We are going to see inflation fall away sharply soon and that is what this rally is pricing. However, I agree with McElligott. The Fed has more work to do so I await a deeper recession signal from the US plus spillovers to Europe and China, and a much larger correction to forward EPS.