A Fallow Period

Its the beginning of the year.  Everyone wants to predict what will happen in 2023.  But you can't force your views on the market.  People want to make the big call, for a big move, with time frames to match, like weak 1st half, strong 2nd half, etc.  You can't put a time frame for big moves during a period of range bound trading with little edge.  

Sometimes there just isn't much to do.  Or even to talk about.  Sure, I could talk about the big move on Friday in the bond market, and in stocks, on a relief rally that NFP didn't come in hotter on wages and jobs number, and due to a weak ISM services.  But I don't believe that storyline.  People won't tell you this, but over 90% of the explanatory power for Friday's moves were beginning of the year funds flows waiting for the NFP and ISM services to come out to pile into bonds and stocks (to a lesser extent) no matter what.  Its time sensitive and price insensitive money flows.  The kind of flows that moves markets.  Its of course a much better story to talk about a possible soft landing with wage growth weaker but jobs number strong (i.e. Goldilocks according to the media)  causing a surge of money to go to bonds and stocks.  That's not sustainable IMO. 

While the day to day movements are volatile, the week to week movements have been tame.  It almost seems as if the stock market has just became a 0DTE casino where bettors come in the morning and leave in the afternoon, win or lose.  Since I'm not smart enough to guess what the intraday movement will look like, I stay away from those daytrading games.  Before you had the HFTs dominating these markets with their front running and predatory algos, there were good daytrading opportunities even in index futures and big cap stocks.  But since around 2014-2015, its gotten tougher as the algos have gotten more advanced and the dumb money has been squeezed out of the short term game.  

It took a few years of flat to down results for daytrades for me to admit defeat in the intraday game.  I still dabble in single stocks for daytrades, but not SPX.  SPX and NDX are solely swing or position trades, which is where the sweet spot is for my style.  Yes, great daytrading opportunities made a brief comeback in single stocks in 2020 and 2021, but that's over.  We're definitely back to the same HFT dominated intraday flows which are tough to beat.  

For the Treasuries space, this is the fallow period.  A range bound market that doesn't get too bearish or too bullish, but is still dangerous to play because of the above average volatility that happens on a whim.  For example, the moves in the global bond markets were savage in December, when the market shot up on a cooler CPI, squeezing shorts, only to get hammered by a hawkish ECB and then a few days later by the BOJ loosening up yield curve control.  By any measure, the moves were overreactions, as the first week of 2023 has taken back most of the bond market moves happening in the last 2 weeks of December, without any meaningful changes, other than the calendar year.  If you were in the middle of the battle with long bond positions while the market was trading super weak, you were feeling some heat.  

For the index futures space, this is a much to do about nothing type of market.  Lots of day to day volatility, but not going too far on a week to week basis.  Definitely not the type of market that is great for longer time frames.  You aren't seeing extremes on either side, so its hard to put on a meaningful position with conviction.  

Here are the forces that are at play:  beginning of the month inflows into international stocks and bonds, lifting prices in those markets, while you see outflows from crowded, overvalued tech stocks from both retail and institutions.  They are not a sign of a trend change, just short term strategic flows coming from institutions that are putting cash to work, insensitive to price so they are moving markets.  Its not going to last much longer, as these type of flows are time sensitive and usually get done within the first 2 weeks of the year.  So at this point, its not really playable, except to fade it if it goes on for a few more days and gets extreme.  Some of the money being thrown at the emerging markets because of the China reopening theme is getting close to a short term extreme, near short term exhaustion points.  

Really, its a stretch to try to find good, high risk/reward opportunities at this juncture.  Things just feel too neutral.  In SPX/NDX, it feels like the crowd is leaning a bit bearish, but that's warranted given the weakness over the past month.  But even that bit of bearishness has gone away after the nonfarm payrolls/ISM services boosted sentiment.  The crowd is still not bullish enough to safely put on long term short positions.  Positioning is still leaning a bit too bearish after the heavy December outflows from equity/bond funds for me to want to put on equity shorts.  And I'm not even bothering to look for longs, as that's a dangerous game in this type of post bubble market that hasn't gone down to reasonable valuations.  There is still a lot of fat left in this bloated pig to shear off.  

As for Treasuries, with a Fed likely to raise at least 2 more times to 4.75-5.00%, possibly a bit higher, its not a great risk/reward trade at this point when 10 years are trading below 3.60%.  The curve is just too inverted (2s-10s at -70 bps) to expect a big rally in bonds without a Fed signal of a pause or a big shoe to drop, neither of which are likely to happen in the next 2 months.  So Treasuries are probably range bound here, trading in the range built up in December, just like the SPX.  Its a boring call, but everything feels neutral, and I don't expect a catalyst in the next 2 months to take this market out of this range bound trade.  Thinking SPX 3740 to 3980, UST 10 yr yield 3.40% to 3.90% until March.  Only interested in the short side for SPX/NDX around 3940-3980.  Interested in the long side if UST 10 yr is 3.90+%, small interest on the short side if US 10 yr is 3.40+%.  

This may be an exciting time for day traders due to the big intraday swings, but its a boring time for position traders.  Not pushing it here, letting the markets come to me, even if it means doing little for several weeks.  

By the way, if I'm not putting out posts in the coming weeks, its because there is not much to talk about and nothing to do.  When you don't have an edge, its best to just keep quiet.