Yesterday was classic bear market action. Even if this is a short term bottoming process, a messy U bottom that gives you multiple chances to buy the lows is a sign of weakness. A clean V bottom, that only gives you one chance to buy the lows is a sign of strength. We had V bottoms for most of 2009 to 2021. U bottoms were rare. Now the V bottoms are rare, and the U bottoms are back with a vengeance.
What was shocking about yesterday's selloff was the bond market weakness after a less hawkish Powell and a very weak stock market. That is not a good sign for either stocks or bonds. I though 3.00% 10 year yields would provide some resistance to this surge higher in yields, but it was just another speed bump towards higher yields. Scary if you are leveraged long in bonds, like a lot of risk parity funds are, along with a long stock position. A double whammy for risk parity, which are under extreme duress this year, and in particular since beginning of April.
Powell's lack of inflation fighting credibility is hurting the bond market here, the market may have cheered his soft stance on rate hikes in knee jerk fashion, but after thinking about it for several hours, bond investors dumped en masse, even with a vicious stock selloff, realizing that inflation is the enemy, not higher short term rates.
The only strong market that I see on my screen are commodities, which continue to truck higher. Natural gas going to the moon, crude oil steadily rising and recovering from a sharp pullback in March/April, and diesel prices hitting all time highs, higher than 2008 levels when oil went to $147/barrel, speaking to a shortage of refinery capacity and strong demand for oil products. Supply/demand dynamics are extremely bullish for most commodities. Plus the obscene levels of excess liquidity provided by the Fed/Congress/White House in 2020-2021, which is just fuel for the fire.
This is nothing like what we've seen for the last 13 years. Many are offsides here: risk parity funds, investors concentrated in tech, bond funds, passive equity funds, etc. Really the only group that is relatively outperforming this year are the habitual underperformers, the hedge funds. This may one of those periods where hedge funds propensity to be high fee, lower beta versions of SPY will help them, not hurt them.
Dark pool activity/dealer gamma shows levels that usually lead to short term rallies, of course with the disclaimer that the data only goes back to 2011, so basically only covering a bull market. Lots of statistical based strategies, mostly based on mean reversion buy the dip will fail in this bear market.
Still waiting patiently for that ripe shorting opportunity in tech stocks, have a feeling its coming later this month.
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8 comments:
Owl this is what I am observing-
HFs deleveraging-net and gross
Retail has been buying(reasonably aggressively)
Darkpools have been buying
Buybacks have restarted
Firstly do you agree with these observations?
And secondly if you do,how do you reconcile this?
Joseph Faggianelli
Yes, I agree but we are starting to see mutual fund/ETF outflows, which is also adding to the selling coming from the hedge funds.
Retail buying is less relevant these days because they just don’t have the same firepower (lost a bunch in meme, options, and big cap tech, no stimmy) as they did in 2020 and 2021.
Corporate buybacks is a force in this market, and is the only thing keeping this market from completely falling apart. By the way, dark pool buying includes a lot of retail and corporate buyback flow.
Since 2011, elevated dark pool buying is bullish for the next 4 weeks, but that data ser covers a huge bull market, so its debateable whether that tendency will persist in a bear market. I feel like it won’t be as effective, thus less actionable.
The selling is so intense on the down days, and hedge fund net exposure is low looking back over the past 2 years, but not nearly as low as early 2016, 2011. And I would argue that this market is much more bearish than either 2011 and 2016, both of which had a very strong bond market, providing a great hedge for stock investors.
So yes, I still see a short term bounce, but considering post bubble dynamics, expect it to last only 2-3 weeks.
Didn't know that about darkpools.So it's buybacks and retail.Surely some HFs?Not passive?
Re the point you make about buybacks holding up the mkt-as interest rates go up these become less attractive for corporates?
Joseph Faggianelli
Passive funds like index funds usually don't use dark pools, they are not worried about price, they are worried about getting filled to fulfill their mandate of being 100% invested in the index. So their volume is actively looking to get filled, either to buy when inflows, or to sell when outflows.
Dark pool buying = opportunistic buying (not urgent, active buyers looking to hit the off to get long).
Most buybacks are happening from free cash flow, not from corporate borrowings, so interest rates not really a factor here. Cash flows are. Free cash flows are still strong so buybacks will likely continue.
No end in sight. You must have good money management to withstand moves like these.
is this a good time to go long? and if yes, spy, qqq or something as crazy as arkk - just for a short term 2 week move? would love insignts.
Looking to buy some energy stocks tomorrow. No SPY, no QQQ, none of that garbage. only stuff that hedge funds are looking to buy. They are the only group as a whole that is not under extreme duress, and they will use their free cash to buy energy, not garbage tech ARKK or overvalued big caps in QQQ and SPX.
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