In my view, stocks are going to crash. Just like they did in 2001, 2008, and 2020. The US is going into recession, earnings are going to adjust downards, and stocks have discounted none of it:
A fresh rout in regional banks roiled trading desks around the globe, with brewing anxiety about the next financial shoe to drop making traders increase their bets on Federal Reserve interest-rate cuts.
Another unsettling round of trading halts in the financial industry hit Western Alliance Bancorp and PacWest Bancorp this time amid losses that topped 60% for each stock. The rout engulfed several other lenders — big and small — with First Horizon Corp. down over 30% after its merger with Toronto-Dominion Bank was scrapped. A probe into Goldman Sachs Group Inc.’s role in Silicon Valley Bank’s deal also weighed on sentiment.
All 21 shares in the KBW Bank Index of financial heavyweights such as JPMorgan Chase & Co. and Bank of America Corp. retreated. The $2.5 billion SPDR S&P Regional Banking exchange-traded fund closed at the lowest since October 2020. The rout in banks kept a lid on the broader market, with the S&P 500 briefly paring losses amid gains in some big tech names, but still suffering its fourth straight decline.
The KBW is telling us a US credit crunch is underway. It will be followed by an unemployment shock, consumption bust, inventory cycle, and recession.
Yet positioning in stocks is long. The Market Ear has more.
Will they puke?
Latest update on the CTA projected flows via Goldman’s flow guru Scott Rubner. Downside convexity is huge. Don’t forget that down also means dealers enter even shorter gamma land and will need to sell deltas, and will act as a “destabilizer” for the overall market.
Threshold levels are: st 4085, mt 4046 (the most important) and lt 4133.
Maybe the quants have started to “Sell in May”
The JPM quant model QMI has fallen sharply in April and is now on par with levels observed in 2008 & 2020, when central banks were easing policy. JPM quant team: “The sharp fall in the QMI implies ‘Sell in May’ may be in focus, with our analysis suggesting a high probability of lower bond yields, rising volatility, and exposure to Europe & Value likely to see downside risks.” (JPM quant)
Liquidity lull is over
The most important driver the coming months will likely be a renewed tightening liquidity, after a pause over the winter months. One key factor limiting the fallout from bank failures in March was the Feds aggressive lending to banks, but as bank unrest has eased, the Fed’s QT policy is dominating US liquidity trends once again. The ECB will also reduce their balance sheet when TLTROs mature in June, and there is even speculation that the BoJ will have to stop the printing press. As a result, the liquidity lull is over, and markets once again face the same contraction that we saw through most of 2022.
Bear market – peak to trough
Can things be this great?
Liquidity matters
US money supply M2 yoy% vs KRE…
They always break something
Fed funds vs KRE needs little commenting. The question is how this spills over…and how aggressively they start cutting?
The VIX “gap” shrinking
There were a few “VIX” pundits that showed us the great VIX vs SPX gap recently. You do not compare mean reverting to trending asset over longer time periods. Anyway, that “gap” is much smaller…and for the sake of it “last time VIX closed here SPX traded close to 4000…”
AI or die
Good comment via JPM delta one team on the AI theme: “What changed this week? CHGG’s move demonstrated the risk is currently asymmetric to the downside. The AI impact is going to be MASSIVE and INCREDIBLY DEFLATIONARY. However, we are still in the early innings of monetization, but the speed at which things are moving is remarkable (The “leader” in AI is MSFT, and we still don’t exactly know how they plan to monetize). Commentary re: AI impacts are very similar to banks. “Guilty until proven innocent.” As such, the winners will see share gains/margin expansion, and the cost of losing could be extinction.”
Tech IPO market is totally frozen
Lowest level in almost a decade.
It’s not just CTAs that are long. All of the robots have piled in. Goldman has more.
We estimate that total Systematic strategies purchased +$173.8B worth of global equity futures over the past 1-month. Total Systematic strategies have now downside asymmetric skew for Global Equities. Check out our estimates for a up big (+$25.2B to buy) vs. down big (-$276.3B to sell) tape over the next 1-month. In other words, the buyers are out of ammo.
Long S&P Index gamma is starting to roll off now and there should be less selling of vol. Dealers get short gamma to the downside.
How will these bullish robots panic? Charlie McElligott at Nomura.
When a new Gallup poll (https://rb.gy/2242l) shows that“…nearly half of Americans are anxious about the safety of the money they have in accounts at banks or otherfinancial institutions” (which is as high or higher than during the 2008 crisis),it’s pretty easy to see how this thing could continue to spiral into a more asymmetrically“extreme” outcome, particularly with the AWFUL optics of the Bloomberg story on PACW hitting less than two hours after Fed Chair Powell hiked and downplayed Banks stress
Regarding this point I’m making about the probability distribution shift seen within potential outcomes—in layman’s terms, this is saying that IF the Fed were indeed forced tocut due to building pressureswith Regional Banksand the impact that it can have on the broader US economy through “hard-stop” lending / credit crunch, it most likely would NOT occur in the form of a couple “baby-step” 25bps cuts spread into the end of year—despite the “implied” pricing giving you a kinda / sorta false optic of “3 Fed cuts priced-in” by Dec output
Instead, the Fed path probability distribution has become even “fat taily-er” now after yday’s hike, and hand-in-hand with the Banking-sector drama escalation—perversely, as“more hikes to bleed demand-side inflation” only perpetuates the far more acute Regional Bank “deposit flight / profitability spiral” strainsSure, there is a case where the still resilient US economy—and with it, “still too sticky inflation”—remains firm over balance of the year, especially with the monpol transmission mechanism remaining clogged due to the prior QE / balance sheet excesses (with elements of the fiscal excesses / overshoots remaining too!),which is why this purportedly “restrictive policy” is still struggling to dampen demand-side inflation meaningfully
Hence, YES, there remains a real possibility that Fed Funds could stay “higher for longer” and “paused” still at these current FF levels into Dec23 year-end, as the new defintiion of “Fed hawkishness” has instead evolved to become “pushing back on market-implied cuts” BUT, in the case that the existential Regional Banks “profitability crisis” daisy-chain continues and the then inherent “deposit flight” / “tighter lending” / “credit crunch” dynamic grows more systemic, there is now a “fatter-tail” of the Fed having to do a more draconian “hard pivot” scenario which would see the probabilities of a150bps – 200bps “emergency Fed cut” outcome pick-up even more Delta
The implications of this hard shift into “Dovish” Duration / Receiving in Rates continue to show with extreme prejudice in US Equities thematically,where the same “LongDuration Sensitives” barbell(higher-beta Secular Growth / MegaCap Tech and lower beta Quality / Min Vol / Defensives)against “Short Cyclicality / Value / EconomicallySensitive / Small”(e.g. Energy, Financials)trade is the obvious performance story YTD, as the implications of the lagged-and-variable tightening is viewed as having hastened a now “near certain” Recessionary outcome which feeds the trade
Yet now with even the larger indices slipping closer to “Short Gamma vs Spot” locations, we find the risk of “Downside accelerant flows” is BUILDING from Dealers actually being SHORT DOWNSIDE HEDGES TO CLIENTS
And in the least-surprising update you’ll see all day, all of that recent “outlier” + profitability / risk-adjusted return profile seen across systematic “Short Vol” trades—which I’ve been highlighting as a basis for building potential of a “Vol Squeeze”—is finally beginning to get some comeuppance
…it is going to get increasingly uncomfortable to go back to the “Short the 0DTE -2% OTM SPX Put to fund a 0DTE SPX Call” playbook as the Banks dynamic feels increasingly “unstable” again—because yes, the -2% / -1% 0DTE Put sellers have been arresting nascent selloffs in recent months during this rally—HOWEVER, that flow at the same time then INCREASES THE RISK that the -1.5%move gets blown-through and turns into a -4% / -5% day….
Of course, I could be wrong…
