There was a change when the market went down from SPX 4300 to SPX 3900. It was Powell reiterating what all the other Fed governors were saying, and that is that they will keep hiking to 3.75-4%, and/or until they break things. They also went back to that dirty well again, forward guidance. They couldn't resist flapping their gums and bringing out their cloudy crystal ball, to forecast that there will be no rate cuts in 2023. And they repeated that mantra enough that the STIRs market took out almost 2 rate cuts in 2023, and are now pricing in only 40 bps of rate cuts after the peak in Fed funds rate in March 2023, which has also gone up to 4%, from 3.25% in early August.
That is a huge move in the fixed income market, and during that time, the SPX has gone sideways, and is trading at the same levels as early August. Is the stock market so strong that it can ignore the bond market and remain in its own world? I don't think so. Unlike before Q2 earnings in July, the setup for the Q3 earnings in October is much different. This time, investors are much less worried about earnings revisions or weak guidance. Just watching CNBC and you can see the lack of fear about earnings. Also, the options market is much less hedged now than where it was back in June/July, which increases the likelihood of a left tail move, as investors don't have that much index put protection.
What I am seeing since the bottom last week is the growing optimism about inflation having peaked and about a soft CPI number today, which explains the recent strength. I see it as a combination of shorts covering ahead of the CPI, and longs getting more comfortable buying stocks, trying to play for a short term rally. Also, the news coming out of Ukraine, with their recent success in gaining back territory from Russia has helped investor sentiment on the margin, with some hopes that the war will end sooner than originally thought.
This short term greed, is not a big picture change in investors' views. They all believe that the Fed is still going to keep hiking, and stay hawkish, regardless of the number, but they feel like it can't get any worse and all the "bad" news on Fed and ECB hawkishness is reflected in the market.
Unlike during the rally from mid July to mid August, this latest rally isn't being joined by the bond market, and has a much flimsier foundation of peak inflation optimism, which would make more sense if the bond market was playing along with that view.
Its a bit of an irrational rally, aided by the triple witching options expiration this coming Friday, which has created gamma squeezes that spillover into the indices. Just look at TSLA and AAPL, the 2 biggest options volume names in the market. They have been outperforming the SPX since last Wednesday. Add the time and IV decay of index puts that speeds up as you get closer to expiration, especially in a rising market, and you get a technical squeeze with no fundamental basis.
This gamma squeeze is providing those with dry powder and a bearish bias an opportunity to put on shorts at good risk reward levels. I have had a tendency to short too early after these bounces off of big selloffs, so I've been waiting and holding my fire. The game is about learning from your past mistakes. After the CPI release, especially if we get a soft number, I will be looking to aggressively put on short positions in both SPX and NDX, as well as some individual names that have short squeezed.
Powell putting himself in a box again and trying to rekindle the spirit of Volcker just makes me more bearish on the market than a few weeks ago. Monetary policy works with a lag, but after the September hike of 75 bps, short term cash will be able to collect over 3%, which is quite attractive for such a bad risk asset environment. I expect a steady exodus out of equity funds (hasn't happened yet, still flatlining after big inflows from late 2020 to early 2022) and into cash and money market funds, earning over 3%, in the coming months. The more hikes that Powell does, the more incentive there is for investors to sell equities and collect interest on their cash.
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16 comments:
Well I hope you put on them shorts. Thats was nasty for the bulls.
Would of been nicer getting in at 4140 but now, unless they can turn the tape round fast, we are likely going to get down 3650-3550.
Tried to put on shorts but it got away from me. Vicious move there, and should have been wary of a potential plunge with so many expecting a lower CPI number and a big rally into the number. Was too cautious this time. Definitely didn't see THAT coming. Think it keeps going lower, maybe one weak rally attempt today but that's probably not going to get anywhere.
Out at 3983. Might get a small chance to reload higher.
I put on a half position short. Definitely not an ideal spot, but I think we selloff into the FOMC meeting next Wednesday, and bonds trade extremely weak.
10 points bounce lol. Brutal down move.
Should of just stayed short XD
We went down very fast. Worth a short term long from these levels MO?
I'm going to stay short for the next few days. Not interested in longs until its below 3750, and that's for just a very short term trade.
I am staying short all tech crazy valuation names. They only underperformed the market marginally as likely heavily manipulated. But more down moves and that manipulation may not work leading to huge down moves. Mostly i own october and jan puts on zs, crwd, snow, ddog
Time is on the bears' side. The leading indicators are all flashing red: money supply, yield curve inversion, fiscal impulse, PMIs, etc. It should hit the economy like a ton of bricks within the next 3 months. Question is will it be better to be short stocks or long bonds when that happens. Leaning towards being short stocks in the beginning, and then transitioning to being long bonds, preferably the short end.
No rally today suggests no rally in coming days. just a breather before another leg down or just plain flat
Hmm the bulls managed to turn it round nicely at the end of the day. Bit worryingly for the bears.
Refusing to go down. Might want to rally it to 4000 first.
MO, if retail have bought this down move would you not think the market would take them some way up to raise hopes before dumping instead of dumping straightaway (like now)?
Actually, I think its because retail bought this dip that we are going down without a big bounce. Retail buying the dip means that you still have too many still hoping for a rally. Markets bounce hard when there is less hope, not more.
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